Performance audit, Department of Revenue, Collections Section

PERFORMANCE AUDIT
DEPARTMENT OF REVENUE
COLLECTIONS SECTION
Report to the Arizona Legislature
By the Auditor General
December 1995
Report # 95- 17
STATE OF ARIZONA
DOUGLAS R. NORTON, CPA OFFICE OF THE
aUDITOR GENERAL AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
DEPUTY AUDITORDENEI1IL
December lgt 1995
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Mr. Harold Scott, Director
Department of Revenue
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Department of Revenue - Collections Section. This report is in response to a May 5,
1993, resolution of the Joint Legislative Audit Committee. The performance audit was
conducted as part of the sunset review set forth in A. R. S. 55 41- 2951 through 41- 2957.
This is the % Krd in a series of four reports to be issued on the Department of
Revenue.
This report addresses improvements needed to make the Department's collections
function more productive and also recognizes improvements made since our last
review in 1988. The amount of delinquent taxes owed the State has grown 93 percent
in the past six fiscal years. Delinquent taxes, excluding bankruptcy and other
uncollectible accounts, now exceed $ 205 million. We identify several procedural
changes DOR can implement to collect more of these monies. We also recommend
that DQR add 18 field collectors which will increase collections by over $ 6 million
annually. Comparing DOR's information with other state agencies' databases would
also increase collections by identifying sources of income for delinquent tax payments,
Incorporating a debtor profiling process could also increase collections by more quickly
focusing enforcement efforts on those accounts deemed less likely to be collected.
My staff and I will be pleased to discuss or clarify items in the report*
I This report will be released to the public on December 20, 1995.
I Sincerely,
~ o @ s R. Norton
Auditor General
I 2 9 1 0 NORTH 44TH STREET . SUITE 4 1 0 . PHOENIX, ARIZONA 8 5 0 1 8 . ( 6 0 2 ) 5 5 3 - 0 3 3 3 . FAX ( 6 0 2 ) 5 5 3 - 0 0 5 1
SUMMARY
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Revenue ( DOR), Collections Section, pursuant to a May 5, 1993, resolution
of the Joint Legislative Audit Committee. The audit was conducted as part of the sunset
review set forth in Arizona Revised Statutes ( A. R. S.) 5541- 2951 through 41- 2957. This is the
third in a series of four audits of DOR conducted by our Office.
Ninety- five percent of taxes owed to the State are paid in the correct amount and on time.
Typically, when taxpayers are delinquent, DOR first mails a series of reminder letters. If
taxpayers then fail to pay in full, DOR routes the account to the Collections Section.
Collections staff, using phone contacts and letters, ask taxpayers to make full payment. If
taxpayers cannot, payment agreements can be established. For those unwilling to cooperate,
DOR can levy wages and bank accounts, file liens against property, and in extreme cases
seize property. The few taxpayers who are delinquent account for a significant amount of
money owed to the State; a total of $ 356 million at the end of fiscal year 1995.
Improvements Made Since
Prior Report, But Collections
Gap Increasing
DOR has taken a number of steps to improve its collection function since our 1988 audit
report was issued. As recommended in our previous report, DOR purchased and
implemented an autodialing enhancement to its automated collection system to minimize
the time collectors spent on nonproductive calls. The Office Collections Unit experienced a
$ 14.5 million increase in the tax dollars collected from delinquent accounts in the year
following implementation of the autodialer and other enhancements, and collections have
remained at this higher level through 1995. The Department also extended its phone collection
hours to improve the telephone contact rate and provide better customer service. DOR
significantly expanded its efforts to ferret out unlocated accounts ( skip- tracing), and now
averages more than six times as many successful skip- traces annually as in 1988. Finally, the
Department has taken steps to improve supervision and training of its collection staff.
Despite these improvements, DOR has not kept pace in collecting delinquent taxes.
Delinquent taxes owed to the State, excluding bankruptcy and other " uncollectible" accounts,
have grown from $ 106 million at the end of fiscal year 1989 to $ 205 million at the end of
fiscal year 1995, a 93 percent increase. In contrast, DOR's success at collecting delinquent
taxes has plateaued, averaging approximately $ 125 million over the past five years. As a
result, DOR has been collecting a smaller percentage of total delinquent tax dollars in recent
years than in the past. In fiscal year 1989, DOR collected 80 percent of all net delinquent taxes
owed the State. In contrast, DOR collected only 63 percent of total net delinquent tax dollars
in fiscal year 1995. Our audit findings outline reasons why DOR's performance has declined
and present recommendations that speclfy how millions in additional delinquent tax revenues
could be collected.
Better Use of Existing Enforcement Tools
and Adoption of New Collection Methods
Could Enable DOR to Collect Millions
More in Delinquent Taxes
( See pages 5 through 14)
DOR could generate millions in additional revenue by following levy and lien guidelines,
using automatic withdrawal from taxpayer bank accounts for installment agreement
payments, and allowing taxpayers to pay their debt with credit cards. Our review found that
DOR collectors were, in many cases, not following the Departmenfs wage and bank account
levy and property lien guidelines. These are powerful tools that can be used to enforce
collection of delinquent tax debts. An examination of a statistically valid sample of 200
accounts levied by the Department in June 1994 found collectors complied with DOR
guidelines in slightly less than 25 percent of all cases. An analysis of these cases showed that
levies done according to DOR guidelines were more likely to capture the monies owed to
the State than those cases in which guidelines were not followed. Twenty- nine percent of
the accounts levied per DOR guidelines captured all monies owed to the State, while only
13 percent of the cases in which levy guidelines were not followed captured the entire tax
debt. If all of these levies complied with DOR guidelines, we estimate that the Department
could have collected as much as $ 2.6 million more from levied accounts.
DOR can also increase collections by requiring taxpayers with bank accounts to use automatic
withdrawal to make monthly payments. This is a common practice with mortgage companies,
utilities, and other private and public sector entities. Currently, estimates are that from 50
to 80 percent of the taxpayers on installment agreements fail to make all of their payments
as agreed upon. In March 1995, there were approximately 26,500 accounts, with a total value
of nearly $ 39 million, on payment agreements with the Department Given the high broken
promise rate it appears that millions of dollars go uncollected. To address this, Minnesota
has instituted an automatic withdrawal program for taxpayers on payment agreements. After
15 months, Minnesota found that 65 percent of those with automatic withdrawal paid in full,
while only 18 percent of those on voluntary payment agreements paid in full.
Allowing the use of credit cards to pay delinquent taxes should also be incorporated. Ten
states already use this method to collect delinquent taxes. DOR has approximately 72,000
delinquent accounts with balances less than $ 1,000. These accounts, with a total due of
approximately $ 22.9 million, could be targeted for credit card payments. Mowing credit card
payments could accelerate payment of these debts and reduce the cost of collecting monies
owed. Banks processing credit card transactions generally charge a fee of 1.5 to 3 percent,
which is less than it would cost DOR to collect these accounts. However, statutes would need
to be revised to allow DOR to pay the fee.
Increased Staff Could Result in
Collection of an Estimated $ 6.6 Million
in Additional Delinquent Tax Debts
( See pages 15 through 20)
DOR needs to add staff to address its growing delinquent tax account balance. Although
dollar value of delinquent accounts has increased from $ 106 to $ 205 million over the past
six years, DOR has added relatively few collection staff to meet increased workload demands.
For example, the average collector caseload in the Field Collections Unit has more than
doubled since fiscal year 1990, from 183 accounts per collector to 498. As a result, many cases
are not actively addressed. An additional 18 field collectors could increase net delinquent
tax dollars collected by an estimated $ 6.6 million annually. Cost for these positions is
estimated to be approximately $ 870,000 in the first year. However, the Department recently
transferred six positions from its Individual Income Tax Audit Section to the Field Collections
h i t . Further intra- agency transfers to the Collections Section may be feasible, thereby
reducing the cost of new field collector positions.
DOR Could Enhance Delinquent
Tax Collection by Using Other
State Agencies' Databases
( See pages 21 through 26)
DOR can utilize database information from other state agencies to improve delinquent tax
collections. A comparison of DOR's delinquent taxpayer account information and Department
of Administration ( DOA) state employee and vendor records found 1,355 state employees
owed $ 1,906,963, and 589 vendors owed $ 1,933,898 in delinquent taxes. An analysis of DOR
collections records found that only 49 percent of these state employees and 22 percent of
these vendors, excluding bankruptcies, were on payment agreements to resolve their tax
debts. The analysis also found that DOR had placed 47 state employee accounts in its
" uncollectible'~ file, often because the taxpayer could not be located.
Some of the monies paid to these employees and vendors could possibly have been recovered
by DOR for payment of tax delinquencies. State employee wages and vendor payments can
provide a sound source of income to either pay tax debts in full or arrange payment
agreements. For example, during the nine- month period of our review, over $ 500,000 was
paid out by the State to vendors owing delinquent taxes. By comparing its information with
DOA's databases, DOR can increase the opportunities to more effectively collect delinquent
taxes. DOR agrees with the concept and is considering expanding its procedures to compare
records with the Department of Economic Security's unemployment tax database that includes
information on employees of the majority of Arizona's employers.
Debtor Profiling Could Improve the
Effectiveness of DOR's Collection Program
( See pages 27 through 29)
DOR should consider implementing a debtor profiling program in the future to more
effectively utilize its collection resources. Commonly used in business and already
implemented by some states, debtor profiling ranks the probability of collecting each account
based on several historical factors. This allows collections staff to focus stronger enforcement
efforts on those accounts that have proven more difficult to collect, whereas accounts showing
a better payment record are given more time before any action is taken.
DOR should approach debtor profiling in two ways. First, the agency should determine
whether it can inexpensively implement some basic debtor profiling tasks using its current
automated system. This could include using the automated system to screen whether a person
or business was previously delinquent, or whether or not an account was resolved
satisfactorily or needed additional enforcement action such as a lien or levy. Second, DOR
needs to consider debtor profiling when planning its future automated, more modern
collections system. The current DOR automated collections system is limited in its debtor
profiling capabilities and other more sophisticated collection tasks.
Table of Contents
Page
Introduction and Background . . . . . . . . . . . . . . . . . . . . . . . . . . I
Finding I: Better Use of Existing Enforcement
Tools and Adoption of New Collection
Methods Could Enable DOR to Collect
Millions More in Delinquent Taxes . . . . . . . . . . . . . . . . . . . . 5
Only a Few Severely Delinquent
Taxpayers Subject to
Enforcement Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Inconsistent Application of Levies
May Leave Millions Uncollected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Failure to Follow Lien Guidelines
Leaves Tax Debts Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Payment Agreement Noncompliance
Results in Uncollected Tax Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Finding II: Increased Staff Could
Result in Collection of an Estimated
$ 6.6 Million in Additional
Delinquent Tax Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Delinquent Tax Collections
Not Keeping Pace with
Increasing Number of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Table of Contents ( convt)
Paqe
Finding II: ( con't)
Additional Staff Needed to
Address the Increasing Number
ofCollectionAccounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Finding Ill: DOR Could Enhance
Delinquent Tax Collection
by Using Other State
Agencies' Databases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Nearly $ 4 Million Owed by
State Employees and Vendors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Many State Employees and Vendors
Are Not Actively Paying Off Their
Delinquent Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Match- Off Programs Feasible
and Used in Arizona and
Otherstates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Finding IV: Debtor Profiling
Could Improve the Effectiveness
of DOR's Collection Program . . . . . . . . . . . . . . . . . . . . . . . . 27
Debtor Profiling Increasingly
Used by Private and Public
Collections Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Table of Contents ( can't)
Paqe
Finding IV: ( con't)
DOR Should Consider Using
Debtor Information to Better
Manage Its Delinquent
TaxAccounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Other Pertinent Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Agency Response
Figure
Figure 1 DOR Collection Accounts
Total Year- End Balance
Due vs. Dollars Collected
Fiscal Years 1989 through 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Table
Table 1 Delinquent Taxes of State
Employees and Vendors
as of April 1,1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
vii
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Revenue ( DOR), Collections Section, pursuant to a May 5, 1993, resolution
of the Joint Legislative Audit Committee. The audit was conducted as part of the sunset
review set forth in Arizona Revised Statutes ( A. R. S.) 5541- 2951 through 41- 2957. This audit
is the third in a series of four audits of the Department.
Organization
The Collections Section is one of five sections within DOR's Compliance Division. In addition
to the Collections Section, other sections include Individual Income Tax Audit, Corporate
Income Tax Audit, Transaction Privilege, Use and Severance Tax Audit, and Contested Audit
Resolution. The Compliance Division is the largest division in the Department with 592 of
1,245 total full- time equivalent ( FTE) employees. Due to the Division's size and varied
responsibilities, DOR's audit function was reviewed separately and will be addressed in a
separate report.
In fiscal year 1995, the Collections Section was appropriated approximately $ 5.7 million of
General Fund monies for section operations. The Section has grown slightly over the last
several years, increasing from 201 FTEs in fiscal year 1988 to 235 in fiscal year 1996. In fiscal
year 1995, the Section collected $ 129,463,796 in delinquent tax revenues.
Mission and
Responsibilities
The mission of the Collections Section is to " secure the payment of delinquent taxes and
returns through efficient and impartial enforcement to minimize lost revenues and promote
voluntary compliance with Arizona's tax laws." The responsibilities of the five units within
the section are summarized below.
Office Collections ( 96 FTEs) - This unit collects delinquent taxes from individuals and
businesses who fail to pay monies owed to the State, even after receiving a series of
billing and past due notices. Office Collections is comprised primady of collectors, who
are responsible for making telephone contact with debtors to either collect monies due
or set up a payment schedule. Unit staff may file liens, levies, and subpoenas to enforce
collection of delinquent taxes.
Field Collections ( 48 FTEs) - The Field Collections unit handles sensitive and difficult
cases that have not been resolved through Office Collections efforts. The unit is staffed
with more experienced collectors. In addition to performing duties similar to office
collectors ( such as making telephone contact with debtors and k glie ns, levies, and
subpoenas), these collectors can conduct field investigations of complex tax cases and
may seize property to satisfy tax liabilities.
a Special Collections ( 24 FTEs) - Special Collections coordinates functions that are outside
of the office and field collections mainstream. The unit is made up of collectors and
clerical staff. Among its varied duties, Special Collections handles bankruptcy accounts;
responds to legislative, executive, and Attorney General inquiries; monitors the outside
collections contractor; and applies debtors'tax refunds against past liabilities.
Support Services ( 61 FTEs) - Clerical staff are responsible for assisting the Office, Field,
and Special Collections units by processing collections correspondence, locating debtors
without a current address or phone number, and processing liens, levies, and subpoenas.
Administration ( 6 FTEs) - This unit is responsible for providing management support
to each of the units w i t h the Collections Section.
41988 Report Follow- up
and Update
As part of our current audit, we reviewed concerns identified in our 1988 performance audit
of the DOR Collections Function ( Auditor General Report 88- 6) and found:(')
1988 F~~ g/ RecommendationW: e reported that DOR could increase its phone
collections revenues by at least $ 5 million annually through the use of an autodialing
enhancement to its automated collections system. At the time of this audit, collectors
manually dialed each account's phone number and waited to determine if the call would
be answered. We recommended that DOR request from the Legislature an appropriation
for the purchase of an autodialing system and an automated financial statement package.
Follow- Up: DOR's request for an autodialing system was approved by the Legislature
in fiscal year 1990. The autodial system contributed significantly to the success of DOR's
collection efforts. Revenues generated by the Office Collections Unit increased $ 14.5
million in the year following implementation of the autodial system, an automated call
distribution system, and modifications to DOR's automated collection system. In addition,
delinquent tax revenues generated by Office Collections staff have continued to be at least
$ 17.5 million higher than fiscal year 1990 levels in fiscal years 1992 through 1995.
") We first reviewed BOR1s delinquent tax collection function in 1985 ( Auditor General Report 85- 8).
Follow- up concerning findings and recommendations from this report was included in our 1988 audit.
1988 Findinflecommendation: DOR's phone collectors made calls only between 8 a. m.
and 5 p. m. on Monday through Friday. We recommended that DOR extend its phone
collections hours and schedule staff to work into the early evening and on Saturday
morning in order to improve its telephone contact rate.
Follow- Up: After our report was issued, DOR began calling delinquent taxpayers between
8 a. m. and 8 p. m. on weekdays and 8 a. m. to 12 noon on Saturdays. Currently, DOR has
20 collectors working in the early evenings and 10 working on Saturday mornings. In
addition to extending the hours in which collectors can attempt to contact delinquent
taxpayers, DOR management believes this effort has led to expanded customer service
and increased callbacks during regular business hours.
1988 Finding/ Recommendation: DOR could collect additional revenue by more
aggressively pursuing currently unlocated accounts ( skip- tracing). At the time, DOR had
committed only 2 FTEs to resolving these accounts and completed fewer than 5,000 skip-traces
annually. We made several recommendations in the skip- tracing area. Most
importantly, it was recommended that DOR devote more staffing resources to its skip-tracing
function. In addition, it was recommended that DOR develop, when possible,
automated skip- tracing procedures to replace those performed manually. Finally, a
recommendation was made that DOR consider using private vendors to assist in locating
delinquent accounts.
Follow- Up: A skip- tracing unit was formed in late 1988 and currently has 14 FTEs. For
the past 3 years, DOR has averaged over 37,000 successful skip- traces annually. Currently,
there are a number of automated procedures in use, including on- line access to
information from the Motor Velucles Division ( MVD), the Department of Economic
Security ( DES), the Corporation Commission, and the Internal Revenue Service ( IRS).
Contrary to our recommendation, DOR does not use private vendors to assist in locating
delinquent accounts. DOR found that it is more cost- effective for DOR to perform skip-tracing
internally at this time.
1988 Findinflecommendation: DOR could improve supervision and training to increase
collector productivity and compliance with collection guidelines. We recommended that
DOR require collection supervisors to increase their review of collector performance and
take corrective action when deficient performance is noted. Specifically, supervisors should
monitor and review collector productivity, adherence to DOR guidelines, and use of
proper phone collection techniques.
Follow- Up: A formalized two- step monthly review process was established in 1989 to
measure adherence to guidelines and proper phone collection techniques. Reviews include
periodic monitoring of collector phone calls and examination of account records.
Supervisors meet with collectors each month to discuss their performance. The current
review, however, found significant noncompliance with some collections guidelines.
Managers also need to increase their oversight to ensure collectors comply with guidelines
( see Finding I, pages 5 through 14).
1988 Finding/ Recommendation: DOR provided neither formal training concerning
proper telephone collection techniques nor consistent on- the- job training. It was
recommended that DOR include telephone collection techniques in its new collector
training program instruction. In addition, on- the- job training should be consistent for all
staff.
Follow- Up: Telephone techniques training began in 1988 and has been updated since that
time. All new employees take this class within their first four months of employment.
h addition, a refresher course is offered for experienced collectors. A formalized on- the-job
training program for field and office collections is also in effect and is conducted by
trained facilitators.
Scope and Methodology
Audit work focused on how DOR can reduce the increasing gap between its delinquent tax
account inventory and the amount of money actually collected. This report presents findings
and recommendations in four areas:
The need to strengthen delinquent tax collection enforcement.
The need to increase staff in the Field Collections Unit to address increasing collector
caseloads.
The need to utilize database match- offs to improve taxpayer compliance.
The need to use debtor information to customize debt collection efforts.
This analysis utilized a variety of methods, including extensive interviews with representa-tives
from private collections firms and tax collection agencies in other states. To assess DOR's
success and use of available enforcement tools, 200 levy files and 120 lien files out of those
issued in June 1994 were randomly sampled. In addition, a comprehensive review of 120
cases that entered collections in fiscal year 1993 was performed. A comparison was also made
between computerized data from DOR and the Arizona Department of Administration ( DOA)
to assess state employees' and vendors' tax compliance.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Director of the Department of
Revenue, the Assistant Director of the Compliance Division, and their staff for their
cooperation and assistance throughout this audit.
FINDING I
BETTER USE OF EXISTING ENFORCEMENT
TOOLS AND ADOPTION OF NEW COLLECTION
METHODS COULD ENABLE DOR TO COLLECT
MILLIONS MORE IN DELINQUENT TAXES
DOR can more effectively utilize its delinquent account enforcement options, and adopt
innovative collections techniques successfully used in some other states. Because DOR
collectors have not followed levy guidelines in many cases, as much as $ 2.6 million in
collections revenues remain uncollected. In addition, untimely filing of liens has left millions
of dollars in state tax debt unprotected, leaving the State susceptible to large losses should
debtors liquidate assets. Finally, reducing the number of defaulted payment agreements
through the use of new collection methods could increase the amount collected from tax debt
by millions annually.
Only a Few Severely
Delinquent Taxpayers
Subject to Enforcement Action
DOR's enforcement powers are only used on a relatively small number of businesses and
individuals who refuse to pay taxes voluntarily. Ninety- five percent of revenues received
by DOR ( excluding property taxes) are paid voluntarily. Those who do not pay on time
generally receive a series of three to ten billing notices prior to being assigned to the
Collections Section, depending on the amount of the debt. Even after debtors enter the
collections process, they are typically mailed additional letters, attempts at phone contact
are made, and they are encouraged to make payment arrangements. Therefore, severely
delinquent debtors are given multiple opportunities to comply before enforcement action
is considered. In these cases, enforcement action is necessary to resolve the debt. Appropriate
use of enforcement also encourages voluntary compliance with tax laws. According to the
federal Internal Revenue Service ( IRS), " the knowledge that enforcement is possible and does
happen stimulates all taxpayers to comply with the law."
Inconsistent Application
of Levies May Leave
Millions Uncollected
A substantial amount of potential tax revenue may be left uncollected each year due to
noncompliance with levy guidelines. Most levies were not issued according to DOR
guidelines. Failure to consistently follow levy guidelines and file levies in a timely manner
may result in as much as $ 2.6 million going uncollected annually. To improve adherence
with DOR requirements, the Department should strengthen its oversight of collector actions.
In addition, DOR should also take steps to ensure that required levy source checks are
completed prior to attempting multiple bank ( mass) levies. Finally, DOR should also consider
automating the levy issuance process when a new automated collection system is acquired.
Levies recover revenue when volunfa y efortsfail - DOR uses levies to recover delinquent
taxes when voluntary compliance efforts have proved unsuccessful. A levy is the seizure
of taxpayers' liquid assets in the possession of employers and financial institutions to satisfy
an unpaid tax debt. DOR is entitled to receive proceeds from a taxpayefs paycheck, minus
deductions for self and dependents, to offset liabilities. Guidelines authorize collectors to issue
levies when debtors have been found to be uncooperative, have broken agreements to pay
monies owed, or are in jeopardy situations, such as an impending bankruptcy.(')
If collectors cannot identify a debtor's bank account or place of employment, they may issue
a multiple bank ( mass) levy to two or more banks withm the debtor's area of residence or
business in an attempt to locate an active bank account. When issuing mass bank levies,
collectors must also have reviewed Arizona Department of Economic Security ( DES)
employment records and credit bureau reports within the last 90 days and 6 months,
respectively. This should be done prior to the levy to determine if a specific bank or employer
levy source is available.
Levy guidelines seldoln followed - DOR collectors often do not follow Department
guidelines when filing levies. A statistically valid sample of 200 accounts levied by DOR in
June 1994 revealed that collectors followed guidelines in slightly less than 25 percent of the
cases examined. In 43 percent of all cases, DOR staff waited an excessive length of time to
file the levies. In these cases DOR collectors did not file a first levy for a median of 110 days
after the accounts were eligible for enforcement action. The remaining levies reviewed ( 32.5
percent) were done before all requirements for issuing a levy were met. The most frequent
requirement not met ( 46 of 65 cases) involved mass bank levies that were issued without
either the required DES search or credit bureau check. The case examples below illustrate
the effects of collectors not complying with levy guidelines.
A debtor entered the collections process in June 1991 owing $ 413 in delinquent income
tax. Collectors first contacted the debtor in July 1991 and a payment agreement was
established. The debtor broke his promise to pay after making just one installment.
Collectors contacted the debtor again in November of 1991 and authorized a second
DOR guidelines authorize collectors to classify debtors as uncooperative when they have failed to
respond to a final demand letter and at least two telephone messages, or indicated during telephone
or field contact that they will not cooperate to resolve the account. The guidelines also authorize
immediate levy action when debtors break a promise to pay all, or a portion, of the amount owed after
providing at least a five- day grace period.
payment agreement, which was also broken. Over the next two- and- a- half years, the
debtor was allowed to enter into eight additional payment agreements, breaking promises
to pay each time. DOR did not place a levy on the account until June 1994, three years
after it entered the collections process. Although the bank levy yielded only $ 16, the
debtor paid the remaining liability shortly after enforcement action was taken.
A business debtor with a long history of making tax payments and filing returns late
entered collections in March 1994. The debtor's liabdity quickly grew to $ 3,822. The debtor
agreed to pay the balance in full in April 1994 and collectors advised that a levy would
be issued if the payment was not received. However, although full payment was not
received, no levy was ever issued, even though a potential bank levy source was recorded
in the file and a 1989 levy was successful in resolving a previous delinquency. The
account, with a remaining balance of $ 1,435, was still open at the time of review in May
1995, more than a year after entering the collection process.
$ 2.6 million may be lost annually - Failure to follow DOR levy guidelines may result in
lost revenue totaling as much as $ 2.6 million annually. As part of the review of a statistically
valid sample of 200 accounts levied in June 1994, the effectiveness of levies done according
to Department guidelines was compared with those done without following the guidelines.
Levies done according to the standards were much more successful in capturing the monies
owed than those in which Department guidelines were not followed. Specifically the analysis
showed that 29 percent of the cases in which guidelines were followed captured all monies
owed the State, while only 13 percent of the cases done without adhering to the guidelines
captured the delinquent taxes. When guidelines were followed, levies brought in an estimated
$ 236 per account. In contrast, levies issued when guidelines were not followed brought in
an estimated $ 136 per account. DOR issued a total of 32,649 levies in fiscal year 1994. If DOR
had followed the guidelines in these cases, as much as $ 2.6 million more in delinquent taxes
could have been collected.
Inzyuoveinents to lemjfunction needed - DOR could improve the effectiveness of levies in
the short term by strengthening management oversight and in the long term by automating
the levy determination process. To address widespread noncompliance with levy guidelines,
DOR needs to take steps to improve oversight of collector actions. Supervisors need to more
closely monitor collection accounts to ensure that levies are issued in a timely manner.
Collection supervisors are responsible for periodically reviewing collection accounts to assess
staff compliance with DOR guidelines. However, as noted above, these efforts failed to either
spot or correct compliance problems. DOR management agrees that improved oversight is
needed and believes that additional supervisory positions must be allocated to improve the
span of control. The Department should evaluate existing supervisory oversight and assess
1) whether adequate improvements can be made with available resources or 2) additional
supervisory positions are needed.
DOR can also improve the effectiveness of the levies it issues by taking steps to ensure that
all levy source checks are performed prior to issuing mass levies. Mass levies are sent out
to two or more banks within a geographical area when DOR has not identified a specific
levy source for debtors. The Department has increasingly used mass bank levies in recent
years. In fiscal year 1989, mass levies accounted for only 12 percent of the 18,480 total bank
levies. By fiscal year 1994, nearly 57 percent of the 16,089 bank levies filed by the Department
were mass levies. According to agency officials, the use of mass levies has increased in an
attempt to take a stronger enforcement stance. However, although mass levies should be
done only after a credit bureau check and DES employment search are completed, they are
often performed without these steps being taken to identdy potential wage or bank levy
sources. This adds unnecessary processing costs to financial institutions and to DOR's levy
unit. Financial institutions must research and respond to all DOR levy requests, even when
the debtor has no account with the bank. In addition, DOR's levy unit must produce levy
documents for as many as six banks when mass levies are requested.
Automating levy issuance is a long- term solution to DORss noncompliance problem.
Acquiring a new automated collection system, as discussed in the Other Pertinent Information
section ( see pages 31 through 32), would enable DOR to ensure that levies are done according
to guidehes by programming the system to automatically route accounts to the appropriate
staff when levy requirements are met. Since the early 1980s, the California Franchise Tax
Board has used a collections system that issues both wage and bank levies automatically.
The system, recently upgraded, allows California to resolve approximately 80 percent of its
delinquent income tax accounts prior to collector action.
Failure to Follow Lien
Guidelines Leaves Tax
Debts Unsecured
Collector noncompliance with lien guidelines frequently leaves tax debts unsecmd. Although
liens are an important tool to protect the State's interest in delinquent tax cases and leverage
compliance with tax requirements, liens often are not filed in accordance with DOR policies.
As a result, millions of dollars in potential state revenue may be left unsecured each year.
Improving management oversight, automating lien issuance, and reducing the predetermined
level for issuing liens would better protect the State's financial interests.
A. R. S. $ 542- 1821 through 42- 1822 authorize DOR to file liens whenever delinquent taxes are
owed the State. DOR can file property liens with the county recorder in each of Arizona's
15 counties and the Arizona Office of the Secretary of State to secure tax liabilities. Since liens
are attached to real property, debtors are unable to buy, sell, or borrow against property
within the county until the lien is resolved. In addition, a lien filed with the Secretary of State
limits businesses from financing receivables, inventory, or equipment because lenders would
not be able to ensure that they would be repaid if the business defaults.
Department guidelines require liens to be filed on accounts with balances of $ 750 or more
if the debtors have not made arrangements to pay the balance in full within 30 days for
business accounts or 90 days for individual income tax accounts. DOR guidelines authorize
collectors to place liens on accounts with balances between $ 100 and $ 750 after obtaining
supervisory approval.
Lien guidelines not followed consistently - Collectors often do not file liens according
to DOR guidelines. We reviewed a statistically valid sample of 120 lien cases issued in June
1994 and found that many were filed well after the lien guidelines had been met. Specifically,
our analysis showed that in 40 of the 120 cases ( 33 percent), liens were issued late. Liens were
not filed on these accounts for a median of 155 days after they became eligible for ths
enforcement action. Liens issued on business tax accounts were more likely to be filed late
than those on individual income tax accounts. In nearly half of the 60 business tax cases we
examined, liens were not issued as soon as the guidelines allow. The following case example
illustrates the effect of DOR's failure to adhere to lien guidehes.
A business debtor entered collections in February 1992 with a liability of $ 2,960. Although
collectors left five messages for the taxpayer, the taxpayer did not respond. During ths
time, the debtor's tax liability increased to $ 5,929. Collectors finally reached the debtor
in June 1992. Although the debtor agreed to pay the balance in full in July 1992, no
payment was received and the liability increased further to $ 7,443. Collectors contacted
the debtor to advise that a lien would be filed. However, collectors again allowed the
taxpayer to set up a payment agreement and no lien was filed. This promise to pay was
also broken. A lien was not filed on the account untd February 1993. As a result, this state
tax debt was left unsecured for one year.
Millions of dollars left unsecured - Untimely lien issuance leaves millions of dollars in debts
unprotected each year. As mentioned above, in the 40 cases in which liens were filed late,
liens were not requested for a median of 155 days after they were eligible for enforcement
action. The median dollar value of the liens filed in these cases was $ 2,541. Based on the
sample results, we estimate that late filing of liens in fiscal year 1994 resulted in a total of
approximately $ 19 million being unsecured for at least a portion of the year. 0) It is critical
that DOR file liens as soon as possible because debtors may owe money to multiple creditors.
If the taxpayer begins to liquidate real assets ( e. g. property or capital equipment), only those
The estimated dollar value of tax debts left unsecured for a portion of the year was determined by
extrapolating the results of our statistically significant sample, which found that 33 percent of the liens
were left unsecured. The median value of the tax debt owed was $ 2,541. Thirty- three percent of the
total lien population was 7,504 liens. This number of liens times the $ 2,541 median tax debt owed equals
approximately $ 19 million in tax debt left unsecured for a portion of the year.
creditors with liens on the item or property will be entitled to receive proceeds from the sale.
Therefore, filing a lien protects the State even if the taxpayers default on promises to pay
their debts and begin to sell their assets.
Changes needed to improve lien process - DOR could better protect the State's financial
interests by improving management oversight, automating lien issuance, and reducing the
minimum dollar amount for issuing liens without supervisory approval. Current efforts to
monitor collector compliance with lien guidelines are inadequate. As previously mentioned,
liens were filed late in one- third of the reviewed accounts. This high level of noncompliance
occurred despite the fact that collectors are rated on their compliance with lien guidelines
and noncompliance with these guidelines is considered by the Department to be a " serious
error." As with levies, DOR management agrees that management oversight can be improved
and suggests that additional supervisory personnel are needed.
Automating the lien function would improve consistency in the application of lien guidelines.
As discussed in the Other Pertinent Information section of the report ( see pages 31 through
32), DOR's current automated collection system lacks the capacity to determine when lien
requirements have been met and automatically route accounts to the appropriate staff for
action. New systems are available that can be programmed to make lien determinations and
perform necessary routing. Automation of lien determination has been accomplished in
several other states. Virginia automatically generates liens 75 days after accounts enter
collections. The California Franchise Tax Board has an automated collection system that will
automatically file liens if the debtor fails to resolve the liabihty with a full payment or
approved agreement, Maryland has had an automatic feature for liens on its income tax
collection system since May 1994. After 180 days in the collections process, Maryland's system
automatically files a lien on every account over $ 500. A Maryland official stated that
automating the lien function has been effective in encouragmg payment and, in turn, closing
accounts. This feature has also added uniformity to its collection efforts. Prior to automating
its lien function, Maryland relied on individual collector discretion in interpreting filing
guidelines. As DOR considers acquisition of a new automated collection system, it should
ensure that the system has the capacity to automate lien determination.
The Department should also consider lowering the minimum dollar amount for issuing liens
to better protect the State's interest in delinquent tax cases. As mentioned above, DOR
guidelines require collectors to obtain supervisory approval before f i g liens on accounts
with balances less than $ 750. DOR seldom issues liens when account balances are below ths
level. Four states surveyed and DES have lower requirements for filing liens that range from
$ 100 to $ 500.(') For example, DES' Unemployment Insurance Tax Section routinely liens all
accounts over $ loo.(') Reducing the lien threshold to $ 500 could result in securing as many
as 10,000 debts valued at $ 6.1 million.
These states are Florida, Illinois, Maryland and Texas.
DES is responsible for administering the state unemployment tax collection program for Arizona.
10
Reducing the lien threshold will, however, impact DOR's budget. The fees charged to file
liens with the counties and Secretary of State range from $ 3 to $ 7. In addition, it typically
costs the Department $ 3 to have liens released. Although A. R. S. 542.137.01 provides the
Departments with authority to recover these costs from the taxpayers, any monies recovered
go to the General Fund. Therefore, DOR pays these fees from its budget. If more liens are
issued, DOR will need additional funding to cover the cost.
Payment Agreement Noncompliance
Results in Uncollected Tax Debts
In order to encourage voluntary compliance and reduce defaults that lead to enforcement
action, DOR could improve its payment agreement process. Although DOR relies heavily
on payment agreements to collect tax liabilities, these agreements are frequently broken by
taxpayers, with milhons of dollars in potential tax revenue left uncollected. In addition, even
when debtors have had a history of breaking promises, collectors often continue to allow
new agreements to be made. The Department could minimize the payment agreement default
rate and collect millions more annually by requiring automatic withdrawal for those with
bank accounts and accepting credit cards for payment of smaller tax debts.
The Department frequently uses payment agreements as a tool to collect delinquent taxes.
Debtors entering the collections process are generally given the opportunity to establish
payment agreements with DOR to resolve their tax liability. At any time, a substantial
number of debtors are on payment agreements. For instance, in March 1995 approximately
26,500 collections accounts were on payment agreements. In total, these accounts were valued
at nearly $ 39 million.
Few taxpayers coinply witlz pay~ nent agreentents - Delinquent taxpayers on payment
agreements often break their promises to pay taxes owed the State, resulting in mdlions of
dollars in tax liabilities un~ ollected. I~ n~ r) e viewing a judgmental sample of cases entering
collections in fiscal year 1993, it was found that approximately 50 percent of agreements made
by debtors were broken before the balance was paid in full. A statistically valid sample of
cases with liens filed in June 1994 was also reviewed and it was found that approximately
80 percent of all promises were broken.
Even when promises are broken, DOR frequently allows taxpayers to establish subsequent
payment agreements. Of the 43 cases with payment agreements in our fiscal year 1993
sample, 22 were set up on a second agreement and of those, 11 had 3 or more payment
agreements. One taxpayer was allowed to make 12 separate payment agreements while in
collections. In contrast, three states that we surveyed took enforcement action if a taxpayer
broke two payment agreements. Two states allowed only one broken promise before
DOR considers a promise broken if: ( a) less than 90 percent of the payment due is received; ( b) the
payment is received 12 to 18 days after the due date depending on the tax type; and ( c) a new liability
enters the collection process.
enforcement.(') Our research shows that those with multiple broken promises are less likely
to pay off their tax liability in full, indicating that the fewer promises broken, the greater
the percentage paid of what is owed.
Many broken promises result in less revenue collected - The high default rate on payment
agreements entered into by delinquent taxpayers leaves a substantial amount of potential
revenue uncollected, and prolongs the collection process. As mentioned above, in March 1995
approximately 26,500 accounts, with a total value of nearly $ 39 million, were on payment
agreements with the Department. Although it is difficult to determine the amount of money
that went uncollected because of broken promises ( due to variation in the length of payment
agreements and when during the course of agreements promises are broken), it is clear that
millions of dollars are left uncollected. The case example below illustrates the effect of broken
promises on payment agreement effectiveness.
A business debtor entered the collection process in January 1992 owing $ 195 in sales tax.
Collectors first contacted the debtor in February 1992 and an agreement was made to
pay the liability in full. The payment was not received when due. The taxpayer was set
up on four additional payment agreements between March and August 1992. Promises
to pay were broken in each instance. Further tax liabilities were incurred by the debtor
throughout this period, and by September 1992 the balance due increased to $ 10,190. The
debtor made a string of sporadic payments, reducing hs liability to $ 1,254 in April 1993.
However, the liability then increased because the debtor did not submit payment when
returns were filed. DOR continued to set up payment agreements with the debtor and
no levies were attempted until August 1993, when a bank levy brought in $ 2,965. This
account was still active at the time of our review, with an unpaid balance of $ 19,375.
Installment agreements are broken primarily because payment is voluntary and agreements
are long- term. The voluntary nature of payment agreements leads to a high broken promise
rate. Under DOR's current system debtors are responsible for sending in a check with their
payment each month, rather than having payments deducted automatically from their bank
account. In addition, our review of payment agreement data showed that agreements with
longer terms were more likely to be broken than those with shorter terms. DOR staff recently
examined a sample of 289 Office Collection accounts on payment agreements. Their research
indicates that in 59 percent of these cases, payment agreements exceeded a year in length.
In addition, 26 percent of the cases were for longer than three years. The DOR study
concluded that the lengths of many payment agreements are " far outside the realm of
reasonableness."
Maryland, Minnesota, and Virginia gave two chances; Illinois and Texas gave only one chance.
Steps needed to reduce the broken promise rate - Compliance with payment agreements
could be improved in a variety of ways, including:
Requiring automatic withdrawal - Compliance with payment agreements could be
improved signhcantly by mandating use of automatic withdrawal for those with bank
accounts. Automatic withdrawal payments are received directly from banking
institutions without taxpayer involvement The use of automatic withdrawal is common
in private sector installment agreements. Many mortgage, automobile, and student loan
payments are made in this way. To address voluntary compliance problems, the
Minnesota Department of Revenue initiated an automatic withdrawal program for
payment agreements in 1993. After 15 months Minnesota found that 65 percent of those
with automatic withdrawal had paid in full, while only 18 percent of taxpayers on
voluntary payment agreements had paid in full. In addition to a dramatic increase in the
compliance rate, Minnesota officials indicated that the automatic withdrawal program
also has reduced administrative and clerical work because fewer checks must be
processed and less correspondence with the taxpayer is needed.
Monitoring payment agreement length - Improved management oversight is needed
to ensure that payment agreement lengths are reasonable. DOR's typical payment
agreement standard timeframe is 12 months or less. However, DOR now allows
payment agreements up to three years in length for some debts under $ 5,000. In practice,
payment agreements often have even longer terms. DOR management should more
closely monitor payment agreements to ensure that the number of installments and the
installment amounts are appropriate.
Allowing credit card payments could enhance collections - Accepting credit cards
for smaller tax debts would enable DOR to reduce reliance on payment agreements and
increase dollars collected. DOR currently does not accept credit cards for any tax
payments. The Federation of Tax Administrators has identified 12 states that accept
credit cards for tax payments. Ten of these states accept credit cards for delinquent tax
payments. The Governmental Finance Officers Association ( GFOA) supports use of
credit cards for state and local government tax payments. The GFOA reports that
accepting credit cards accelerates payment and reduces the cost of collecting monies
owed. Oregon has accepted credit cards as a method of payment for delinquent taxes
since 1990. An Oregon administrator stated that approximately 1,000 taxpayers utilized
this service during fiscal year 1994, allowing the collection of about $ 1 million in
revenues annually. In Arizona, if credit card payments were permitted for liabilities up
to $ 1,000, many accounts could be paid in full rather than being placed on an installment
agreement As of July 1995 there were 71,971 collections accounts assigned to the Office
and Field Collections Units, valued at approximately $ 22.9 million, with balances less
than $ 1,000.
DOR would need additional statutory authority to absorb credit card fees for delinquent
tax debts. Banks processing credit card transactions charge a fee of 1.5 to 3 percent for
credit card use. Credit card companies, such as Visa and Mastercard, generally do not
allow those accepting the credit card to pass the fee along to the cardholder. Six states
have obtained authority to pay the fee, which, at 1.5 to 3 percent, is generally less than
DOR's cost of collecting delinquent tax accounts.
RECOMMENDATIONS
1. The Legislature should consider providing DOR statutory authority to allow the
Department to deduct applicable credit card fees from the tax payments received.
2. The Department should take the following steps to increase the effectiveness of
enforcement tools.
~ s Improve management oversight of collector compliance with DOR lien and levy
guidelines.
Ensure that required levy source searches are done prior to issuing mass levies.
m Reduce the dollar threshold required to file liens without supervisory approval.
3, As the Department considers acquiring a new automated collections system, it should
ensure that systems under consideration are capable of automating levy and lien
determination.
4. The Department should require automatic withdrawal for delinquent taxpayer payment
agreements, where available.
5. The Department should monitor payment agreements to ensure that the number of
installments and the installment amounts are reasonable.
FINDING II
INCREASED STAFF COULD RESULT
IN COLLECTION OF AN ESTIMATED
$ 6.6 MILLION IN ADDITIONAL
DELINQUENT TAX DEBTS
The Arizona Department of Revenue needs to increase collection staff to address the
growing number of delinquent tax accounts and increase the tax debts it collects. Although
the total dollar value of delinquent tax accounts entering the collection process has increased
93 percent since fiscal year 1989, amounts collected each year from these debts have
experienced little or no growth during ths period. The number of delinquent accounts
assigned to field collectors has become excessive and needs to be addressed. Increasing staff
in the Field Collections Unit would reduce the number of accounts assigned to collectors
and could enable DOR to increase the tax debts it collects by an estimated $ 6.6 million
annually.
Delinquent Tax Collections
Not Keeping Pace with
Increasing Number of Accounts
Increasing numbers of delinquent accounts have outpaced DORIS ability to collect them.
DOR's workable delinquent tax account balance that could feasibly be collected has risen
from $ 106 million to $ 205 million in the past six fiscal years. In contrast, the amount of
delinquent taxes collected has plateaued at approximately $ 125 million over the same time
period. Much of the growth in delinquent tax accounts is attributable to DOR's increase in
audits performed during the early 1990s. The growing number of delinquent tax accounts
has resulted in backlogs in the later stages of the Department's collections process and aging
accounts that are more difficult to collect.
Delinquent accounts increasing while collections remains the same - DOR's collections
efforts have not kept up with its increasing delinquent account numbers or balance. Over
the past six fiscal years, the delinquent account balance that could feasibly be collected has
grown 93 percent.(') DOR's collections efforts, however, have plateaued at $ 125 million
annually over those same six fiscal years. Historically, DOR has been able to collect a larger
(') Bankruptcy accounts were excluded because DOR has no authority to collect them. DOR determined
" uncollectible" accounts were also excluded because the Department cannot collect them for various
reasons, such as no addresses, etc.
percentage of delinquent taxes owed. However, this percentage has declined as the number
of accounts has increased. Figure 1 illustrates the increase in DOR's delinquent account
balance versus the dollars collected from these debts since fiscal year 1989.
Figure 1
DOR Collection ~ ecounts(~)
Total Year- End Balance Due vs. Dollars Collected
Fiscal Years 1989 through 1995
0
1989 1990 1991 1992 1993 1994 1995
Fiscal Year
I ITo tal Year- End Balance Due Dollars Collected
(") These figures exclude bankruptcy and DOR- determined " uncollectible" accounts.
Source: DOR delinquent account year- end balance and collection data for fiscal years 1989 through 1995.
16
Several reasons for increasing numbers of delinquent tax accounts - The growing number
of delinquent tax accounts can be attributed to a variety of factors. First, an increase in the
number of audits conducted by the Department has led to a significant increase in
dehquent tax accounts. The number of audits rose from 28,354 in fiscal year 1989 to 116,796
in fiscal year 1994, a 312 percent increase. Audit cases not resolved voluntarily or through
negotiations are eventually forwarded to the Collections Section. Audit- related receivables
now account for 38 percent of all receivables in the collection process. Second, Arizona's
rapid population growth has also contributed to the growing number of delinquent tax
accounts. Between fiscal years 1989 and 1995 Arizona's population increased approximately
16 percent. Finally, DOR management also cites the transient nature of Arizona's population
as a reason for the increase in accounts entering the Collections Section. According to DOR,
accounts for individuals living in Arizona only seasonally or staying a short time are
difficult to pursue and collect. During the same period, the Collections Section has
experienced relatively little staffing growth to absorb the extra cases.
Backlog and aging accounts - The increase in delinquent accounts has caused backlogs in
the later steps in the collections process and has resulted in accounts aging with little or no
action taken.
Much of the growth in delinquent accounts has particularly impacted workloads in the later
stages of the collection process: field collections; accounts referred to a private collection
agency; and those deemed uncollectible.(') In fiscal year 1991 these three areas accounted for
only 19 percent of all cases in the collections process. In fiscal year 1995, these same areas
comprised 41 percent of all accounts assigned to the Collections Section. During this period,
Field Collections accounts have risen from 7,762 to 20,398, accounts referred to a private
collection agency grew from 10,701 to 27,880, and uncollectible accounts increased from
8,343 to 21,199. Increases in the number of delinquent accounts in the Office Collections
Unit, which is responsible for initial collection efforts for accounts entering the section, has
not been as dramatic since accounts unresolved by collectors in this unit can be forwarded
to Field Collections or a private collection agency. In addition, the Office Collections Unit
has added 28 staff in the last 5 years and in 1994, due to a backlog in Office Collections,
management transferred 10,000 accounts to Field Collections and a private collection agency.
Accounts entering the collection process generally are assigned first to the Office Collections Unit.
Collectors attempt to make telephone contact to request payment or set up an installment agreement.
In instances when taxpayers refuse to pay or fail to adhere to the terms of payment agreements,
collectors attempt to enforce collection through use of liens and levies. Accounts unresolved by Office
Collections Unit staff are typically forwarded to either DOR's Field Collections Unit or a private
collection agency for further collection efforts. The Field Collections Unit receives in- state accounts
with balances due of $ 200 or more. Field collectors may file liens and levies, make field visits, and
conduct seizures in their efforts to resolve tax debts. A private collection agency attempts to collect
in- state tax debts less than $ 200 and most out- of- state accounts. If field or private collectors cannot
resolve tax delinquencies, accounts may be deemed uncollectible.
Because DOR has been unable to keep pace with delinquent tax accounts entering the
collection process, accounts have aged and, as a result, can become more difficult to collect.
Many of the accounts currently assigned to the Collections Section have been in the
collection process for years. For instance, nearly half of all delinquent tax accounts have
receivables with money due from 1991 or before. As accounts age, the possibility of
collecting the tax debts decreases because taxpayers may move and be difficult to locate, or
companies may go out of business.
Additional Staff Needed
to Address the Increasing
Number of Collection Accounts
DOR needs to increase its collection staff to address the growing number of delinquent tax
accounts. Collector caseloads in the Field Collections Unit have become excessive whle
staffing levels and the dollars collected have not increased. Adding 18 new field collector
positions would reduce caseloads to a more manageable level, and could enable the
Collections Section to increase the money collected from tax debts by $ 6.6 million annually.
Collector caseloads umnageable - Field collectors cannot adequately manage current
caseloads. Since fiscal year 1990, the number of accounts assigned to the Field Collections
Unit has grown 272 percent. Due to the unit's rising caseload, the average number of
delinquent accounts per collector has increased from 183 to 583 between fiscal years 1990
to 1995. Furthermore, many collectors have caseloads well above these levels. As of April
1995, ll of the 35 collectors had caseloads greater than 750, and 2 of these had caseloads in
excess of 900. In contrast, the IRS assigns no more than 109 cases to experienced field
personnel. Other states also assign fewer cases to field collectors. A survey of five other
states found that their field collector caseloads ranged from 100 to 300 cases.(')
Excessive caseloads make it dlffrcult for field collectors to take the actions needed to resolve
many of their assigned cases. Due to excessive caseloads, agency management has instructed
its field collectors to focus their efforts on accounts with balances greater than $ 5,000. These
cases comprise only 18 percent of all accounts assigned to the Field Collections Unit.
However, on average, field collectors have 96 accounts over $ 5,000 assigned to them.
According to supervisors and staff, there is little time to work on accounts with balances
less than $ 5,000. If accounts cannot be resolved in field collections they may eventually be
classhed as uncollectible, contributing to the significant growth in the uncollectible inventory.
Collection and stafling levels stagnant - Field collection staffing has remained constant at
35 collectors for the past 5 years and tax debts collected by the unit have plateaued at
approximately $ 21 milhon. Although the number of cases assigned to the Field Collections
(" States surveyed involved Colorado, Florida, Illinois, Texas, and Virginia.
18
Unit nearly tripled between fiscal years 1990 and 1995, no new staff were added during this
period.
Recognizing that field collector caseloads are excessive, DOR recently created several new
field collector positions. During the course of our audit, the agency authorized a transfer of
six Individual Income Tax Audit Section positions to the Field Collections Unit. As a result,
the average field collector caseload dropped from 583 to 498 at the start of fiscal year 1996.
Staffincreases needed - Although DOR has taken steps to begin addressing excessive field
collector caseloads, further staffing increases are needed. Agency management believes each
field collector can manage approximately 300 to 350 cases. An additional 18 field collectors
are needed to lower the average caseload from 498 to approximately 350.~' T) his would raise
the total number of field collectors to 59. The estimated cost of adding collection staff is
approximately $ 870,000 in the first year.( 2) H owever, the cost of adding new field collectors
may be reduced if positions can be transferred from other areas within the Department. As
mentioned above, DOR recently transferred positions from the Individual Income Tax Audit
Section to the Field Collections Unit. Further interagency transfers to the Collections Section
may be feasible, which could reduce the cost of adding collection staff.
Adding field collector positions would enable DOR to significantly increase the amount of
revenue collected by its Field Collections Unit. In fiscal year 1994, the median amount
generated by field collectors over the entire year was $ 667,000. The minimum amount
collected by a field collector during this period was $ 413,000. If each of the new collectors
generated $ 413,000, they could collect a total of $ 7.4 million annually. This would result in
an estimated net collection of $ 6.6 million annually.
DOR needs to utilize a staged approach to implement staffing changes. According to DOR
management, the addition of 18 field collectors, 2 supervisors, and 2 support staff will impact
its collections processes. For example, office collectors will apply for field collector positions
and field collectors will apply for the supervisor positions. In addition, if DOR is able to
provide these additional positions internally through downsizing another functional area
rather than through a budget request, additional personnel changes would occur. Based on
the need to better ensure that collectors are following lien and levy guidelines, DOR
expressed concern that their numbers of collectors- per- supervisor ratio may be too high. We
did not, however, conduct audit work to determine this. Because of these factors, DOR will
need to plan for and execute the changes needed to add more collectors over a period of
time to ensure minimal disruption of operations.
We recommend adding only 18 collectors because we believe that recommendations for improved
enforcement in Finding I will decrease the number of cases referred to the Field Collections Unit, and
further reduce collector caseloads.
( 2) This estimate includes 18 field collectors, 2 supervisors, and 2 support staff. Employee- related
expenditures of 24 percent and travel costs have also been accounted for. In addition, the estimate
includes a one- time cost of $ 99,000 for needed office equipment.
RECOMMENDATION
To address excessive field collector caseloads, BOR should request additional funding for
18 additional field collectors. However, the Department may be able to minimize the cost
of new collector positions by transferring positions horn other areas within DOR to the
I
Collections Section.
FINDING Ill
DOR CAN ENHANCE
DELINQUENT TAX COLLECTION BY
USING OTHER STATE AGENCIES' DATABASES
A taxpayer entered DOR's collection process in September 1990 with a balance due of $ 1,1 69.
Unaware that the taxpayer has been a state employee since October 1991, the Department
has never levied the employee's state wages. In addition, by the time of our review in June
1995, the employee's tax debt had increased to $ 2,400.
Using information maintained by other state agencies could help DOR collect more delinquent
taxes. A comparison of DOR's collections database with two of the Department of
Administration ( DOA) payments databases identified over 1,300 state employees and almost
600 vendors who owe nearly $ 4 million in delinquent taxes. Many of these delinquent
taxpayers were not actively paying off their debts. Database comparisons such as the
DOR/ DOA example can help DOR identify income sources that can then be used to either
pay off the debt or establish a payment agreement. DOR concurs and has proposed
expanding the concept to compare its database with a Department of Economic Security
( DES ) employer database that contains information on employees of the majority of Arizona's
employers.
Nearly $ 4 Million Owed by
State Employees and Vendors
A comparison of two DOA databases with DOR's found that state employees and vendors
on state contract owed nearly $ 4 million in delinquent taxes. We obtained Department of
Administration employee and vendor data on electronic tape and performed a match- off
with DOR's delinquent account records by comparing the lists of state employees and vendors
to the lists of dehquent taxpayers.
State emplmjees owe considerable back taxes - State employees owe a significant amount
of delinquent taxes, as shown in Table 1 on page 22. Analysis showed that 1,355 state
employees owed $ 1,906,963 in income and business taxes. Although 531 of the delinquencies
were less than $ 200,354 employees had tax debts of $ 1,000 or more. Many of these accounts
have been in the collection process for years. Thirty- seven percent of these accounts, totaling
over $ 1.2 million, date from 1992 or earlier. This case example illustrates difficulties DOR
may have collecting delinquent taxes without having other information provided by a
database match- off.
In July of 1994, DOR attempted to levy the wages of a taxpayer who owed over $ 2,000
in delinquent taxes and whose account had been assigned to the Collections Section since
1990. However, the taxpayer was no longer employed at the company to which the levy
was mailed. At the time of this levy, the taxpayer was employed by the State, and had
been for over three months. The employee's state wages have never been levied.
Delinquent Taxes of State Employees and Vendors
as of April 1, 1995
State State
Employees Vendors
Total Dollars Owed
Total Number of Accounts
Dollar Range:
$ 200 or less
Between $ 200 and $ 1,000
$ 1,000 or more
Date Entering the Collection Process:
Before 1990
Between 1990 and 1993
1993 and later
Source: Auditor General staff comparison of DOA employee and vendor data with DOR tax delinquency
data.
Vendors with state contracts have considerable tax delinquencies - Many vendors doing
business with the State also have tax debts. We chose a nine- month period from July 1994
% bough March 1995, and identified those vendors who received payments while they had
tax delinquencies. Five- hundred and eighty- nine vendors owe a total of $ 1,933,898 in
delinquent taxes. The largest single debt is $ 150,181. Two- hundred and twenty- four vendors
each owe $ 1,000 or more, and their total delinquency is $ 1,835,419. A number of these cases
have also been in collections for several years. One- hundred and fifty- one vendor accounts,
valued at $ 921,415, entered Collections before 1993. The following case example illustrates
that vendors could be paying off delinquent taxes with monies received from the State if
DOR were aware of this income source.
A taxpayer has entered the collection system numerous times with balances exceeding
$ 10,000. As of August 1995, the account had a delinquent balance of $ 66,555. During the
nine- month period of the sample match- off, this taxpayer received $ 111,080 in state
payments, none of which were applied toward the liabihty. A match- off program would
have enabled DOR to levy sufficient payments to resolve the account, with no need for
collector intervention.
Many State Employees and Vendors
Are Not Actively Paying Off Their
Delinquent Taxes
Because DOR does not currently obtain the information available through match- offs on state
employees and vendors with delinquent taxes, many of them are not actively paying off the
taxes they owe. Our match- off found that only 49 percent of state employees, ( excluding those
in bankruptcy), with delinquent income or business taxes had a payment arrangement with
DOR. In addition, DOR had placed 47 state employee delinquent accounts in the
" uncollectible" file. The most common reason for this was that these taxpayers could not
be located.(') Further, 152 employee accounts were sent to a private collections agency because
they could not be resolved through internal departmental efforts. If DOR was aware that
delinquent taxpayers and businesses were receiving state monies, it could have accessed those
monies through levies or payment agreements rather than assigning the accounts to private
collectors, who charge a 22 percent collections fee.
Five- hundred eighty- nine delinquent vendors received payments from the State in the sample
nine- month period covered by our investigation. Of these vendors, just 105 - less than 22
percent of those not in bankruptcy - had made payment agreements with DOR. Twenty- five
accounts were classified as uncollectible, and 27 had been sent to outside collections
agencies.(?)
Because DOR does not perform match- offs with other state information, it may be unaware
that state payments have been made that could be used to offset delinquent tax debts. For
example:
Accounts may also be classified as uncollectible in hardship situations, when debtors are incarcerated,
or when corporations become defunct.
( 2) DOR indicated that many of these state employees and vendor accounts are being worked on even
if a payment agreement does not exist.
A delinquent taxpayer began working for the Arizona Department of Corrections in
September 1994, at that time owing a balance of $ 12,280. The account has been in
collection since January 1987. The balance has since grown to over $ 13,000.
DOR assigned the account of a firm owing $ 12,900 to a collection agency in August 1994,
claiming there were no levy sources and that they had exhausted their collection options.
However, the State paid $ 133,345 to the firm between July 1994 and March 1995, including
$ 106,516 after the account was sent to a collection agency.
It appears that the State could collect much of the dehquent tax amounts owed by state
employees and vendors either through direct payment, payment agreements, or account
levies. Income from state employment or contracting for services is a sure source for
collections. In the nine- month period covered by our test match- off, over $ 500,000 was paid
by state agencies to tax delinquent vendors that could possibly have been recovered by DOR
for payment of tax debts. In addition, many delinquent taxpayers owe relatively small
amounts that could either be paid in full or subject to a payment agreement For example,
39 percent of the state employees with delinquent taxes owe $ 200 or less and 35 percent owe
between $ 200 and $ 1,000. The average state employee debt is $ 1,407. The average for state
vendors is $ 3,283. One- hundred and ninety- five vendors owe $ 200 or less and 170 owe
between $ 200 and $ 1,000.
Match- Off Programs Feasible and
Used in Arizona and Other States
Match- off programs can aid in collecting delinquent taxes. DOR currently operates two very
successful match- off programs, and at least two other states run successful programs. Creating
a state employee and vendor match- off program would not be costly. DOR has proposed
expanding the concept beyond just state employees and vendors to all public and private
sector employees, except federal employees, by matching its information against the
Department of Economic Security's ( DES) employer database.
DOR's cuwazt programs - DOR currently operates two successful debt offset programs.
The Department has a program to check whether those scheduled to receive tax refunds
owe dehquent taxes. Before tax refunds are issued, they are automatically offset against
any outstanding tax liabilities from previous years. In fiscal year 1994, $ 3,680,828 in delinquent
income taxes was recouped from 24,357 individual taxpayers while 177 accounts yielded
$ 382,973 in corporate tax. In a second program, DOR checks whether those receiving the
refunds owe money to other state agencies that have filed claims with the Department. Eleven
agencies participate in this DOR program. For example, the University of Anzona submits
claims to DOR for those owing for housing, student loans, and parking. The Department
of Economic Security submits claims for individuals owing chdd support. In the first half
of 1995, this program produced $ 3,540,000 in payments against 25,124 matches.(')
0 t h states - Some other states have successful match- off programs. The Illinois
Department of Revenue's program has been operating since 1986. It covers both individual
and business tax delinquencies and generates up to $ 1 million per year. The match- off in
Maryland has yielded $ 15,000,000 in its 12- year existence. In addition to the obvious benefits,
in each case, officials believe that the existence of the programs also has considerable incentive
effects in encouraging taxpayers to settle their tax liabilities.
Programs not expensive - Setting up and operating an automated match- off program for
state employees and vendors would not be expensive. The debt set- off program currently
administered by DOR cost $ 110,400 to operate in fiscal year 1994. DOR officials estimate that
the programming changes necessary to implement a match- off could be accomplished in
282 to 424 hours of programmer/ analyst time, costing between $ 10,000 and $ 15,000.
DOR proposes an expanded program - DOR has proposed expanding the match- off concept
beyond state employees and vendors to include all employees in the State, except those
working for the federal government. DOR is proposing matching its database against a DES
employer database. The DES employer database lists all non- federal Arizona employers and
employees that are liable for unemployment tax. Therefore, this match- off would identify
wage levy sources for the majority of persons working in Arizona that owe delinquent taxes.
This would include state employees, state university employees, other public sector
employees, and private sector employees. In a letter dated October 30,1995, DOR requested
that DES, begin performing the programming necessary for a monthly match- off. DES has
estimated that the effort will cost $ 4,820 for development and testing and $ 142 for monthly
production costs. For state vendors, DOR agrees that a DOA/ DOR match- off is needed and
reports that it is currently working with DOA to implement such a program.
In 1990, DOR also conducted a pilot match- off program with the Arizona Department of Transportation
and the Arizona Department of Corrections. DOR staff manually reviewed records provided by these
agencies to identify vendors with delinquent sales tax returns or receivables. Although $ 415,733 was
collected from vendors identified through these efforts, the program was discontinued in the first year
because the manual nature of the program was labor intensive and management felt staff time could
be better spent on other collection activities.
RECOMMENDATIONS
I. DOR should develop and implement a program to match payments made to state
employees and vendors on state contracts with state tax liabilities to expedite the
collection of tax delinquencies.
2. DOR should continue development and implementation of a program to identify wage
levy sources by matching its dehquent tax information with the Department of
Economic Security's unemployment tax database of employers and employees.
FINDING IV
DEBTOR PROFILING COULD IMPROVE
THE EFFECTIVENESS OF DOR'S
COLLECTION PROGRAM
DOR could use debtor information to better manage its delinquent tax accounts. Information
about debtors is increasingly being utilized by public and private collection firms in
determining the steps needed to resolve account delinquencies. DOR should consider using
debtor information in the future to enhance the effectiveness of its collection program.
Debtor Profiling Increasingly
Used by Private and Public
Collections Agencies
Information concerning debtor characteristics is now being used to customize collection
efforts. Data regarding debtor characteristics can be utilized to assess the risk associated with
accounts and determine what actions are necessary to resolve delinquencies. Debtor profiling
is being done by private and public debt collection operations, as well as banking and
mortgage institutions that issue loans.
Debtor profiling - Information concerning debtors can be used to improve the effectiveness
of collection efforts. Debtor profiles, also referred to as behavioral collection scoring, can be
developed to assess the likelihood of collection or the " risk" associated with an account.
These models incorporate variables such as the number of previous delinquencies, actions
taken to resolve previous delinquencies, amount and age of the receivable, and the debtor's
taxable income.
Profiling provides fairer, more equitable treatment of taxpayers, taking strong collection
action only against those avoiding payment, not those attempting to comply. For example,
a taxpayer with no previous history of delinquency owing a relatively small amount may
be sent a number of automated billings attempting to resolve the account before phone
contact is attempted. In contrast, an account that has been in collections previously and has
required enforcement actions to force resolution may not receive any automated letters or
phone contact but would simply be forwarded for swift and appropriate enforcement action.
Collection agencies utilizing debtor information - Private and public collection operations
are increasingly using information concerning debtor characteristics to customize collection
efforts. The federal General Accounting Office ( GAO) reports that debtor profiling is
becoming more common in private firms. Modeling techniques also are being used by banks
and mortgage companies to determine whether loans should be approved and what actions
should be taken when loan payments are past due. Interviews with private firms indicate
that customizing the collection process has led to both increased revenue collection and
improved customer relations. The GAO noted similar findings in a 1993 report.
Public tax collection agencies are also beginning to use debtor profiling. For instance, in
response to a recommendation from the GAO, the IRS has initiated a pilot behavior scoring
program in its western region with the intention of eventually implementing these models
nationwide. Some states also are beginning to better utilize debtor information and customize
collection efforts. For instance, the Minnesota Department of Revenue distinguishes between
cooperative and uncooperative business taxpayers based on current and past responses to
collection efforts. In addition, the California Franchise Tax Board implemented behavior
scoring technology to prioritize all accounts entering its collection system.
DOR Should Consider Using
Debtor Information to Better
Manage Its Delinquent Tax Accounts
Debtor profiling would enhance DOR's ability to effectively manage collection accounts. In
most cases, the Department does not use information concerning debtors to tailor collection
efforts. Debtor profiling could be accomplished through acquisition of available software or
reprogramming of DOR's existing automated collection system.
DOR does slot utilize debtor profiliirzg for irlzost accounts - Generally, the Department uses
the same process for all delinquent accounts without considering how likely it is the
taxpayer will pay his debt DOR typically utilizes a three- stage collection process using
automated letters, followed by phone contact, then field collection. Except for cases involving
large delinquencies, an account generally follows this same process until the case is resolved
or deemed uncollectible. In fiscal year 1994,57.1 percent of accounts entering collections had
been in the collections process at least once before. No steps are taken to classify these
accounts differently from first- time offenders. The following case example illustrates how
debtor profiling could have assisted DOR in more quickly resolving a delinquent account.(')
A taxpayer entered the automated collection system on July 8,1991. The taxpayer made
three promises to pay the liability and defaulted on each one. Over the course of 14
months, 8 phone attempts, 1 field call, and 3 levies were necessary to finally resolve the
(') Accounts within the collection process, however, are prioritized by both dollar amount and receivable
age. In addition, large accounts are selected out for immediate action. Further, BOR may also deviate
from its typical collections process if other factors arise.
account on September 23,1992. On July 13,1993, the taxpayer became delinquent for a
second time and was placed in phone collections, in accordance with agency policy. DOR
then made 15 phone attempts before taking enforcement action, 1 year after the entry
date. During this period the taxpayer again broke many promises to pay and the liability
increased from $ 228 to $ 2,740. Ths case was finally resolved in May of 1995, almost two
years after it entered collections. This account could have been forwarded directly to the
field collections unit based on its prior hstory. This would have accelerated resolution
and saved a sigruficant amount of collector time.
Debtor profiling is feasible - The Department should consider using debtor profiling to
enhance its collection efforts. Software is available to develop and evaluate debtor profiling
models. The California Franchise Tax Board utilizes this software to fachtate its account
ranking and has stated it improved collector efficiency by directing resources where they
are most effective.
DOR should approach debtor profiling in two ways. First, DOR should determine whether
it can inexpensively implement some basic debtor profiling tasks using its current automated
system, such as whether a person or business was delinquent previously, or whether or not
an account was resolved satisfactorily or needed additional enforcement action such as a lien
or levy. Second, DOR needs to take into account the need for debtor profiling as it considers
a more modern automated collections system in the future. The current automated collections
system is limited in its capabilities to do debtor profiling and other more sophisticated
collection tasks. Other pertinent information regarding the benefits of a more modem
automated collections system is presented on page 31.
RECOMMENDATION
1. DOR should consider utilizing debtor profiling in the future to customize debt collection
efforts.
OTHER PERTINENT INFORMATION
During the course of our audit, we reviewed the adequacy of DOR's current automated
collection system and compiled information on more innovative systems.
Current Automation Outdated
The Department's automated collection system is outdated and limited in its performance.
A 1985 performance audit conducted by our Office identified the need for an automated
collection system. A system was purchased later that year and was implemented in 1987.
This automated collection system replaced a manual process and significantly improved
collection levels. However, the system's capabilities are limited, especially given the
increasing number of accounts now in the collections inventory. Computer technology in
the collections area has progressed rapidly in the eight years since DOR implemented its
current system. Problems with system effectiveness include:
Lack of reliable information - The Department's automated collection system does not
provide necessary information to make informed management decisions and monitor
accounts. For example, the percentage of cases collected in full cannot be tracked. The
system also does not provide information concerning success of liens, levies, and payment
agreements. On numerous occasions during our audit work, basic statistics related to
collection performance could not be generated by DOR's automated collections system.
Dependence upon collector intervention - DOR's current automated system relies
heavily on collector intervention. Manual decisions must be made by DOR collection staff
before action can be taken on an account. Liens and/ or levies cannot be performed
without a collector viewing an account and determining this action is appropriate.
Accounts cannot be moved between worklists without a collector instigating the change.
In contrast, the Arizona Department of Economic Security, Unemployment Tax Division,
is able to automatically route accounts under $ 100 to a separate worklist These accounts
are then sent automated letters to encourage payment Actions are more timely since the
computer locates these accounts rather than a collector.
Technology has been developed since DOR implemented its current system, which is
designed specifically for public sector collection operations. Benefits of these systems include:
Increased debtor information - To customize collection procedures, detailed information
must be maintained concerning the characteristics of debtors and previous collection
actions taken by the Department Advanced automated systems track and summarize
enforcement actions taken on each account, the success of these enforcement actions, and
the number of payment agreements entered into and kept.
Automatic routing of accounts - Accounts can be moved by programming Department
criteria into the system, therefore bypassing collector intervention. Management would
have the ability to define criteria for an account to be moved within the system. For
example, accounts within specifred dollar and age ranges could be searched out and
instantly routed to a workllst for a specific action. Management would have this
capability through their personal computers. In contrast, management currently needs
to request mainframe programming.
Consistent use of enforcement tools - FOP accounts meeting Department enforcement
criteria, typically liens and/ or levies, action could take place without collector intervention
and with greater consistency. Swifter action could be taken on seriously delinquent
accounts.
Other state collection operations are in the process of implementing these types of systems
to increase the effectiveness of their collection efforts. Cost estimates for these innovative
collection systems range from $ 350,000 to $ 900,000. However, results of these new systems
are not yet available.
I Agency Response 1
FIFE SYMINGTON ( GOVERNOR
ARIZONA DEPARTMENT OF REVENUE
1600 WEST MONROE - PHOENIX, ARIZONA 85007- 2650
HAROLD SCOTT
DIRECTOR
December 13, 1995
Mr. Douglas R. Norton, Auditor General
OEce of the Auditor General
2910 North 44th Street, Suite 410
Phoenix, AZ 850 18- 7243
Dear Mr. Norton:
We have received the final report of your performance audit of the Department of
Revenue ( DOR), Collections Section. Following is our response to that audit report in the
form of an overview, general comments on some of the findings, and specific responses to
each recommendation:
OVERVIEW
The Department has a significant conceptual disagreement with the Auditor General
regarding the approach that should be taken to the collection of delinquent taxes.
Throughout the Collection report, a repeating theme is that the Department's
determination on enforcement action should be governed by an established set of rules
which are then essentially followed automatically. The Department disagrees with this
approach.
The Department believes that each taxpayer's situation is different and collectors need the
flexibility to customize their collection strategy to each individual situation. The fact that
a taxpayer is in some form of economic distress does not change the fact that he is our
customer and that the collection strategy utilized should be the one that maximizes
collections while minimizing the intrusion into, and effect upon, the taxpayer's life.
Therefore the Department views its guidelines as exactly that -- a standard against which
the collectors should measure their individualized collection strategies. When liens and
levies are not issued at the time set forth in the guidelines, that does not by itself constitute
a failure to follow the guidelines; instead, it may represent an appropriately considered
OTHER LOCATIONS: Tucson Government Mall - 400 W. CONGRESS - TUCSON
East Valley - 144011460 E. SOUTHERN - TEMPE
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 2
decision by the revenue officer using his professional judgment that a different approach is
more appropriate. That is why they are " guidelines", not rules.
In most cases ( in fact, all that are specifically cited in the report), it is not a question of
" lost" revenues, but an issue of the timing of collections. Collecting the delinquent
amounts, albeit at a later date with interest, has resulted in the State being made whole
without making the taxpayer who has fallen upon hard times a victim of an unthinking,
unfeeling, rule bound bureaucracy.
It is also worth noting that the Department averages approximately $ 1,000,000 per year in
collections for each collector position. This average collection is generated despite a
terribly high attrition rate ( and therefore vacancy rate) for collectors driven by an
uncompetitive salary structure and the difficult nature of the job. Given a six month
training cycle, and the impact on senior collectors who must provide the on the job
training, the single biggest gain, at the lowest overall cost, could be achieved by raising the
salaries of the collectors thereby reducing attrition and providing the state with
experienced collectors.
The Department's various efforts to continually improve and refine its collection processes
are bearing fruit. The downward trend since 1994 in collectable accounts receivable
shown in the chart on page 16 of the report has continued. The collectable accounts
receivable balance, as of the end of November, has dropped to $ 200.7 million.
FINDING I
Only those delinquent taxpayers who require enforcement action are and should be
subiected to enforcement action. While the statement that only a few severely
delinquent taxpayers are subjected to enforcement action may be factually correct, it is
misleading. The Department believes, as do most public and private collections
programs, in staging its collections efforts. Most taxpayers will, and do, pay their
liabilities without forcing the Department to take enforcement actions. As you note, only
those who fail to do so should, under normal circumstances, be subjected to enforcement
actions. Subjecting the State's citizenry to unnecessary levy and lien action would be an
abuse of Departmental authority.
The alleged inconsistent application of levies will not leave millions uncollected. The
Department agrees that for a period of time in late 1994 and early 1995 some collectors
did not issue levies in some cases where such action was appropriate. The Department
identified this problem and took steps to remedy it. In FYE95, the Collections Section
issued levies on 52,597 accounts, a 61% increase over FYE94. However, the suggestion
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 3
that as much as [ emphasis added by DOR] $ 2.6 million may have gone uncollected
annually is unsupported by the data.
The cost effectiveness of an automated l e v svstem is suspect. The Department agrees
that a computer system that could use expert type systems to evaluate the likelihood that a
levy is appropriate at a given time would be helphl to the Department and its collection
process since it would assist the collector and his supervisor in making the final decision.
However, it must be recognized that the introduction of such a system would necessitate a
major capital expenditure since the Department's current automated collection system is
incapable of implementing such a system. The Department has been unable to identifl
any vendor or set of vendors who could provide such a system at the costs set forth in the
report ($ 350,000 to $ 900,000). The Department's experience leads it to conclude that
such a system, if purchased today, would cost well in excess of one million dollars.
Whether the gain from such a system would be worth the costs of purchasing and
implementing it is a matter that must be carefblly studied.
Pavment agreements need to be carefullv monitored, but more aggressive collection
actions will not necessarily increase revenue to the state and mav unnecessarily
harm the taxpavers. The report states that millions of dollars went uncollected because
of broken promises. As in several other places, that kind of statement is misleading.
There are many reasons why a promise may be recorded as broken, some of which are
circumstances beyond the control of the taxpayer. DOR collectors have the discretion to
use their professional judgment and consider the circumstances in deciding whether to
reset payment agreements or pursue forced collections. The goal is not to punish the
taxpayer but to secure resolution of the tax debt in the fairest, least intrusive and
burdensome manner possible.
Having said that, the Department does agree that in late 1994 and early 1995 some
collectors were failing to take appropriate enforcement action when taxpayers failed to
perform upon their payment agreement promises and meet their tax obligations, and the
Department had already implemented new management policies to see that the collectors
utilize their judgment to defer enforcement action only in appropriate circumstances. The
management study referenced on page 12 was part of that self- initiated internal
management review by the Collections section.
Recommendation I. 7he Legislature should consider providing DOR statutory authority
to allow the Department to deduct applicable credit card fees from the tax payments
received.
The Department has been studying and planning to implement the use of credit cards in
limited circumstances in fbture years. However, as in the case of automatic withdrawal
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 4
payments, the most troublesome accounts will be those of persons who are not credit
worthy and do not have credit cards.
The Department believes that the Legislature should closely examine the impact of
permitting the Department to absorb the credit card fees. Many credit cards grant the
holders benefits deriving from the use of the card ( frequent flyer miles, cash back, etc.)
and under varying circumstances won't even charge interest if the account is paid
promptly. The legislative change suggested by the report could induce many taxpayers to
use the credit card in lieu of the payment they would normally make. The impact on the
state of absorbing the fee in such cases could be substantial.
Recommendation 2. The Department should take the following steps to increase the
effectiveness of enforcement tools.
R Improve management oversight of collector compliarzce with DOR lien and levy
guidelines.
e Ensure that required levy source searches are done prior to issuing mass levies.
R Reduce the dollar threshold required to jle liens without supervisory approval.
The Department believes it has already taken steps to improve management oversight of
all aspects of collector compliance with DOR lien and levy guidelines, including the
requirement for levy source searches prior to issuing mass levies, as evidenced by the
internal collections study referenced in the report.
The Department will do a pilot test to determine if lowering the dollar threshold for liens
is cost effective. If it proves to be cost effective, this may be addressed in future budget
requests.
Recommendation 3. As the Department considers acquiring a new automated collections
system, it should ensure that systems under consideration are capable of automating levy
and lien determination.
When considering the acquisition of a new automated collections system, the Department
will include this feature in the RFP. While the Department disagrees with the concept of
automatically issuing a levy or lien irrespective of the unique facts and circumstances of an
individual case, it does agree that automation could enhance the professional efforts of the
collectors to structure the appropriate collection strategy for each taxpayer. The extensive
system recommended by the Auditor General needs to be carefully studied given its cost.
Meanwhile, the Department has been working for more than a year on a series of
computer programs that will significantly increase the automated capacity of the
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 5
Department to issue and release liens and to reduce the costs associated with those
actions.
Recommendation 4. lhe Department should require automatic withdrawal for delinquent
taxpayer payment agreements, where available.
While the Department has no objection to implementing an electronic fbnds withdrawal
program for taxpayers on payment agreements if it will generate greater compliance at less
cost, it is worth noting that many delinquent taxpayers are not credit worthy and do not
have bank accounts from which to make automatic withdrawals. Since such a program is
necessarily limited to those taxpayers with bank accounts, they are a preselected group of
delinquent taxpayers who are most likely to meet their tax obligations anyway. In
addition, there will be costs associated with establishing such a program. The Department
will pilot test this program and if it proves effective, will seek its implementation.
Recommendation 5. The Department should monitor payment agreements to ensure that
the number of installments and the installment amounts are reasonable.
The Department will continue to monitor payment agreements to ensure they are
reasonable. However, to the extent that the recommendation implies that payment
agreement length should be restricted, the Department notes that the IRS is currently
permitting individual taxpayers to enter into three year payment agreements and it would
be extremely difficult to establish a significantly different standard given the imminent
implementation of a nationally recognized program between the Department and the
Southwest District of the IRS to place common delinquent taxpayers on a coordinated
payment agreement for both agencies.
Recommendation. To address excessive field collector caseloads, DOR should request
additional funding for 18 additional freld collectors. However, the Department may be
able to minimize the cost of new collector positions by transferring positions from other
areas within DOR to the Collections Section.
The Department agrees that additional staff is needed, especially in field collections, to
collect the delinquent taxes owed to the State. In recognition of the need for additional
collectors and changes in compliance patterns of individual income tax filers, the
Department had already designed and commenced implementation of a plan to convert
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 6
sixteen individual income tax audit positions into collector positions. Six of these were
converted to field collector positions and the remaining ten to office collectors. While
these sixteen positions have already improved the overall effort, the additional 18 field
collector positions recommended by the Auditor General will have a very positive effect
on reducing the field collector caseloads to a workable level. The Department is
continuing to monitor and identifl full time positions that could be better utilized in
collections.
The Department's various efforts to continually improve and refine its collection processes
are bearing fruit. The downward trend since 1994 in collectable accounts receivable
shown in the chart on page 16 of the report has continued. The collectable accounts
receivable balance, as of the end of November, has dropped to $ 200.7 million.
FINDING III
Recommendation I. DOR should develop and implement a program to match payments
made to state employees and vendors on state contracts with state tax liabilities to
expedite the collection of tax delinquencies.
The Department agrees that automation of the process of matching employees to
delinquencies would enhance collections. However, the Department believes that focusing
attention on only state employees is a shortsighted effort. Instead, the Department is
working with the state Department of Economic Security to implement a total automated
matching program of all delinquent taxpayers against the DES employment tax records in
order to identifl potential wage levy sources. This program, when completed, will
provide the Department with the matching capability for almost all waged employees, not
just state employees.
The Department agrees that a vendor matching program with the Department of
Administration is a good idea and has established a joint task force with the Department of
Administration to implement such a program.
Recommendation 2. DOR should continue development and implementation of a
program to identzfi wage levy sources by matching its delinquent tax information with
the Department of Economic Security's unemployment tax database of employers and
employees.
As indicated above, the Department is doing this.
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 7
FINDING IV
Recommendation I. DOR should consider utilizing debtor profiling in the future to
customize debt collection efforts.
Debtor profiling is a fairly new technology that has great promise but has not yet been
successfUlly implemented in government tax agencies. The successhl implementation of
debtor profiling is dependent upon the quantity, quality and accessibility of debtor
information. Furthermore, much of the debtor profiling being used in the private sector is
aimed at the extension of credit rather than the collection of monies owed.
The Department would have a great deal of difficulty implementing debtor profiling with
its current automated collection systems. The implementation of debtor profiling would
depend upon not just purchasing and customizing a debtor profiling package but also
upgrading the Department's current automated collection system to a new, more modern
one capable of using such profiles and making additional changes to the Department's
accounts receivable system and mainframe hardware.
The total cost of such a combined package would be substantial. Contrary to the
implication in the report, California's Franchise Tax Board is implementing its debtor
profiling system simultaneously with its implementation of a new automated collections
system. In fact, California officials have indicated to DOR officials that they cannot
determine at this time how much of their improvements are attributable to the new
automated collections system and how much to debtor profiling. Given the necessary
interrelationship between debtor profiling and the automated collection system it feeds and
analyzes, the Department believes that it is more prudent to consider this hnctionality at
the time it upgrades its automated collection system and will do so at that time.
OTHER PERTINENT INFORMATION
While not making a finding, nor a formal recommendation, the report notes that new and
improved systems exist for automating collection activities. The Department agrees that
the current system used by DOR is somewhat outdated and limited in what it can do given
modern technology. However, the Department believes that the report dramatically
understates the true costs of upgrading and makes no effort to quantifL the benefits
associated with such an effort. The Department will study this and, if it believes the
benefits exceed the costs and provide an acceptable return rate, will approach the
Legislature with the proposal.
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 8
The Department commends the Auditor General for recognizing and acknowledging that
the current system is reaching the limits of its capacity and will ultimately have to be
upgraded or replaced with newer technology. It is during that natural evolutionary
transition to newer technology that many of the enhancements suggested can be
appropriately addressed.
Sincerely,
Harold Scott
Director

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PERFORMANCE AUDIT
DEPARTMENT OF REVENUE
COLLECTIONS SECTION
Report to the Arizona Legislature
By the Auditor General
December 1995
Report # 95- 17
STATE OF ARIZONA
DOUGLAS R. NORTON, CPA OFFICE OF THE
aUDITOR GENERAL AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
DEPUTY AUDITORDENEI1IL
December lgt 1995
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Mr. Harold Scott, Director
Department of Revenue
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Department of Revenue - Collections Section. This report is in response to a May 5,
1993, resolution of the Joint Legislative Audit Committee. The performance audit was
conducted as part of the sunset review set forth in A. R. S. 55 41- 2951 through 41- 2957.
This is the % Krd in a series of four reports to be issued on the Department of
Revenue.
This report addresses improvements needed to make the Department's collections
function more productive and also recognizes improvements made since our last
review in 1988. The amount of delinquent taxes owed the State has grown 93 percent
in the past six fiscal years. Delinquent taxes, excluding bankruptcy and other
uncollectible accounts, now exceed $ 205 million. We identify several procedural
changes DOR can implement to collect more of these monies. We also recommend
that DQR add 18 field collectors which will increase collections by over $ 6 million
annually. Comparing DOR's information with other state agencies' databases would
also increase collections by identifying sources of income for delinquent tax payments,
Incorporating a debtor profiling process could also increase collections by more quickly
focusing enforcement efforts on those accounts deemed less likely to be collected.
My staff and I will be pleased to discuss or clarify items in the report*
I This report will be released to the public on December 20, 1995.
I Sincerely,
~ o @ s R. Norton
Auditor General
I 2 9 1 0 NORTH 44TH STREET . SUITE 4 1 0 . PHOENIX, ARIZONA 8 5 0 1 8 . ( 6 0 2 ) 5 5 3 - 0 3 3 3 . FAX ( 6 0 2 ) 5 5 3 - 0 0 5 1
SUMMARY
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Revenue ( DOR), Collections Section, pursuant to a May 5, 1993, resolution
of the Joint Legislative Audit Committee. The audit was conducted as part of the sunset
review set forth in Arizona Revised Statutes ( A. R. S.) 5541- 2951 through 41- 2957. This is the
third in a series of four audits of DOR conducted by our Office.
Ninety- five percent of taxes owed to the State are paid in the correct amount and on time.
Typically, when taxpayers are delinquent, DOR first mails a series of reminder letters. If
taxpayers then fail to pay in full, DOR routes the account to the Collections Section.
Collections staff, using phone contacts and letters, ask taxpayers to make full payment. If
taxpayers cannot, payment agreements can be established. For those unwilling to cooperate,
DOR can levy wages and bank accounts, file liens against property, and in extreme cases
seize property. The few taxpayers who are delinquent account for a significant amount of
money owed to the State; a total of $ 356 million at the end of fiscal year 1995.
Improvements Made Since
Prior Report, But Collections
Gap Increasing
DOR has taken a number of steps to improve its collection function since our 1988 audit
report was issued. As recommended in our previous report, DOR purchased and
implemented an autodialing enhancement to its automated collection system to minimize
the time collectors spent on nonproductive calls. The Office Collections Unit experienced a
$ 14.5 million increase in the tax dollars collected from delinquent accounts in the year
following implementation of the autodialer and other enhancements, and collections have
remained at this higher level through 1995. The Department also extended its phone collection
hours to improve the telephone contact rate and provide better customer service. DOR
significantly expanded its efforts to ferret out unlocated accounts ( skip- tracing), and now
averages more than six times as many successful skip- traces annually as in 1988. Finally, the
Department has taken steps to improve supervision and training of its collection staff.
Despite these improvements, DOR has not kept pace in collecting delinquent taxes.
Delinquent taxes owed to the State, excluding bankruptcy and other " uncollectible" accounts,
have grown from $ 106 million at the end of fiscal year 1989 to $ 205 million at the end of
fiscal year 1995, a 93 percent increase. In contrast, DOR's success at collecting delinquent
taxes has plateaued, averaging approximately $ 125 million over the past five years. As a
result, DOR has been collecting a smaller percentage of total delinquent tax dollars in recent
years than in the past. In fiscal year 1989, DOR collected 80 percent of all net delinquent taxes
owed the State. In contrast, DOR collected only 63 percent of total net delinquent tax dollars
in fiscal year 1995. Our audit findings outline reasons why DOR's performance has declined
and present recommendations that speclfy how millions in additional delinquent tax revenues
could be collected.
Better Use of Existing Enforcement Tools
and Adoption of New Collection Methods
Could Enable DOR to Collect Millions
More in Delinquent Taxes
( See pages 5 through 14)
DOR could generate millions in additional revenue by following levy and lien guidelines,
using automatic withdrawal from taxpayer bank accounts for installment agreement
payments, and allowing taxpayers to pay their debt with credit cards. Our review found that
DOR collectors were, in many cases, not following the Departmenfs wage and bank account
levy and property lien guidelines. These are powerful tools that can be used to enforce
collection of delinquent tax debts. An examination of a statistically valid sample of 200
accounts levied by the Department in June 1994 found collectors complied with DOR
guidelines in slightly less than 25 percent of all cases. An analysis of these cases showed that
levies done according to DOR guidelines were more likely to capture the monies owed to
the State than those cases in which guidelines were not followed. Twenty- nine percent of
the accounts levied per DOR guidelines captured all monies owed to the State, while only
13 percent of the cases in which levy guidelines were not followed captured the entire tax
debt. If all of these levies complied with DOR guidelines, we estimate that the Department
could have collected as much as $ 2.6 million more from levied accounts.
DOR can also increase collections by requiring taxpayers with bank accounts to use automatic
withdrawal to make monthly payments. This is a common practice with mortgage companies,
utilities, and other private and public sector entities. Currently, estimates are that from 50
to 80 percent of the taxpayers on installment agreements fail to make all of their payments
as agreed upon. In March 1995, there were approximately 26,500 accounts, with a total value
of nearly $ 39 million, on payment agreements with the Department Given the high broken
promise rate it appears that millions of dollars go uncollected. To address this, Minnesota
has instituted an automatic withdrawal program for taxpayers on payment agreements. After
15 months, Minnesota found that 65 percent of those with automatic withdrawal paid in full,
while only 18 percent of those on voluntary payment agreements paid in full.
Allowing the use of credit cards to pay delinquent taxes should also be incorporated. Ten
states already use this method to collect delinquent taxes. DOR has approximately 72,000
delinquent accounts with balances less than $ 1,000. These accounts, with a total due of
approximately $ 22.9 million, could be targeted for credit card payments. Mowing credit card
payments could accelerate payment of these debts and reduce the cost of collecting monies
owed. Banks processing credit card transactions generally charge a fee of 1.5 to 3 percent,
which is less than it would cost DOR to collect these accounts. However, statutes would need
to be revised to allow DOR to pay the fee.
Increased Staff Could Result in
Collection of an Estimated $ 6.6 Million
in Additional Delinquent Tax Debts
( See pages 15 through 20)
DOR needs to add staff to address its growing delinquent tax account balance. Although
dollar value of delinquent accounts has increased from $ 106 to $ 205 million over the past
six years, DOR has added relatively few collection staff to meet increased workload demands.
For example, the average collector caseload in the Field Collections Unit has more than
doubled since fiscal year 1990, from 183 accounts per collector to 498. As a result, many cases
are not actively addressed. An additional 18 field collectors could increase net delinquent
tax dollars collected by an estimated $ 6.6 million annually. Cost for these positions is
estimated to be approximately $ 870,000 in the first year. However, the Department recently
transferred six positions from its Individual Income Tax Audit Section to the Field Collections
h i t . Further intra- agency transfers to the Collections Section may be feasible, thereby
reducing the cost of new field collector positions.
DOR Could Enhance Delinquent
Tax Collection by Using Other
State Agencies' Databases
( See pages 21 through 26)
DOR can utilize database information from other state agencies to improve delinquent tax
collections. A comparison of DOR's delinquent taxpayer account information and Department
of Administration ( DOA) state employee and vendor records found 1,355 state employees
owed $ 1,906,963, and 589 vendors owed $ 1,933,898 in delinquent taxes. An analysis of DOR
collections records found that only 49 percent of these state employees and 22 percent of
these vendors, excluding bankruptcies, were on payment agreements to resolve their tax
debts. The analysis also found that DOR had placed 47 state employee accounts in its
" uncollectible'~ file, often because the taxpayer could not be located.
Some of the monies paid to these employees and vendors could possibly have been recovered
by DOR for payment of tax delinquencies. State employee wages and vendor payments can
provide a sound source of income to either pay tax debts in full or arrange payment
agreements. For example, during the nine- month period of our review, over $ 500,000 was
paid out by the State to vendors owing delinquent taxes. By comparing its information with
DOA's databases, DOR can increase the opportunities to more effectively collect delinquent
taxes. DOR agrees with the concept and is considering expanding its procedures to compare
records with the Department of Economic Security's unemployment tax database that includes
information on employees of the majority of Arizona's employers.
Debtor Profiling Could Improve the
Effectiveness of DOR's Collection Program
( See pages 27 through 29)
DOR should consider implementing a debtor profiling program in the future to more
effectively utilize its collection resources. Commonly used in business and already
implemented by some states, debtor profiling ranks the probability of collecting each account
based on several historical factors. This allows collections staff to focus stronger enforcement
efforts on those accounts that have proven more difficult to collect, whereas accounts showing
a better payment record are given more time before any action is taken.
DOR should approach debtor profiling in two ways. First, the agency should determine
whether it can inexpensively implement some basic debtor profiling tasks using its current
automated system. This could include using the automated system to screen whether a person
or business was previously delinquent, or whether or not an account was resolved
satisfactorily or needed additional enforcement action such as a lien or levy. Second, DOR
needs to consider debtor profiling when planning its future automated, more modern
collections system. The current DOR automated collections system is limited in its debtor
profiling capabilities and other more sophisticated collection tasks.
Table of Contents
Page
Introduction and Background . . . . . . . . . . . . . . . . . . . . . . . . . . I
Finding I: Better Use of Existing Enforcement
Tools and Adoption of New Collection
Methods Could Enable DOR to Collect
Millions More in Delinquent Taxes . . . . . . . . . . . . . . . . . . . . 5
Only a Few Severely Delinquent
Taxpayers Subject to
Enforcement Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Inconsistent Application of Levies
May Leave Millions Uncollected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Failure to Follow Lien Guidelines
Leaves Tax Debts Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Payment Agreement Noncompliance
Results in Uncollected Tax Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Finding II: Increased Staff Could
Result in Collection of an Estimated
$ 6.6 Million in Additional
Delinquent Tax Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Delinquent Tax Collections
Not Keeping Pace with
Increasing Number of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Table of Contents ( convt)
Paqe
Finding II: ( con't)
Additional Staff Needed to
Address the Increasing Number
ofCollectionAccounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Finding Ill: DOR Could Enhance
Delinquent Tax Collection
by Using Other State
Agencies' Databases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Nearly $ 4 Million Owed by
State Employees and Vendors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Many State Employees and Vendors
Are Not Actively Paying Off Their
Delinquent Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Match- Off Programs Feasible
and Used in Arizona and
Otherstates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Finding IV: Debtor Profiling
Could Improve the Effectiveness
of DOR's Collection Program . . . . . . . . . . . . . . . . . . . . . . . . 27
Debtor Profiling Increasingly
Used by Private and Public
Collections Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Table of Contents ( can't)
Paqe
Finding IV: ( con't)
DOR Should Consider Using
Debtor Information to Better
Manage Its Delinquent
TaxAccounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Other Pertinent Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Agency Response
Figure
Figure 1 DOR Collection Accounts
Total Year- End Balance
Due vs. Dollars Collected
Fiscal Years 1989 through 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Table
Table 1 Delinquent Taxes of State
Employees and Vendors
as of April 1,1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
vii
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Revenue ( DOR), Collections Section, pursuant to a May 5, 1993, resolution
of the Joint Legislative Audit Committee. The audit was conducted as part of the sunset
review set forth in Arizona Revised Statutes ( A. R. S.) 5541- 2951 through 41- 2957. This audit
is the third in a series of four audits of the Department.
Organization
The Collections Section is one of five sections within DOR's Compliance Division. In addition
to the Collections Section, other sections include Individual Income Tax Audit, Corporate
Income Tax Audit, Transaction Privilege, Use and Severance Tax Audit, and Contested Audit
Resolution. The Compliance Division is the largest division in the Department with 592 of
1,245 total full- time equivalent ( FTE) employees. Due to the Division's size and varied
responsibilities, DOR's audit function was reviewed separately and will be addressed in a
separate report.
In fiscal year 1995, the Collections Section was appropriated approximately $ 5.7 million of
General Fund monies for section operations. The Section has grown slightly over the last
several years, increasing from 201 FTEs in fiscal year 1988 to 235 in fiscal year 1996. In fiscal
year 1995, the Section collected $ 129,463,796 in delinquent tax revenues.
Mission and
Responsibilities
The mission of the Collections Section is to " secure the payment of delinquent taxes and
returns through efficient and impartial enforcement to minimize lost revenues and promote
voluntary compliance with Arizona's tax laws." The responsibilities of the five units within
the section are summarized below.
Office Collections ( 96 FTEs) - This unit collects delinquent taxes from individuals and
businesses who fail to pay monies owed to the State, even after receiving a series of
billing and past due notices. Office Collections is comprised primady of collectors, who
are responsible for making telephone contact with debtors to either collect monies due
or set up a payment schedule. Unit staff may file liens, levies, and subpoenas to enforce
collection of delinquent taxes.
Field Collections ( 48 FTEs) - The Field Collections unit handles sensitive and difficult
cases that have not been resolved through Office Collections efforts. The unit is staffed
with more experienced collectors. In addition to performing duties similar to office
collectors ( such as making telephone contact with debtors and k glie ns, levies, and
subpoenas), these collectors can conduct field investigations of complex tax cases and
may seize property to satisfy tax liabilities.
a Special Collections ( 24 FTEs) - Special Collections coordinates functions that are outside
of the office and field collections mainstream. The unit is made up of collectors and
clerical staff. Among its varied duties, Special Collections handles bankruptcy accounts;
responds to legislative, executive, and Attorney General inquiries; monitors the outside
collections contractor; and applies debtors'tax refunds against past liabilities.
Support Services ( 61 FTEs) - Clerical staff are responsible for assisting the Office, Field,
and Special Collections units by processing collections correspondence, locating debtors
without a current address or phone number, and processing liens, levies, and subpoenas.
Administration ( 6 FTEs) - This unit is responsible for providing management support
to each of the units w i t h the Collections Section.
41988 Report Follow- up
and Update
As part of our current audit, we reviewed concerns identified in our 1988 performance audit
of the DOR Collections Function ( Auditor General Report 88- 6) and found:(')
1988 F~~ g/ RecommendationW: e reported that DOR could increase its phone
collections revenues by at least $ 5 million annually through the use of an autodialing
enhancement to its automated collections system. At the time of this audit, collectors
manually dialed each account's phone number and waited to determine if the call would
be answered. We recommended that DOR request from the Legislature an appropriation
for the purchase of an autodialing system and an automated financial statement package.
Follow- Up: DOR's request for an autodialing system was approved by the Legislature
in fiscal year 1990. The autodial system contributed significantly to the success of DOR's
collection efforts. Revenues generated by the Office Collections Unit increased $ 14.5
million in the year following implementation of the autodial system, an automated call
distribution system, and modifications to DOR's automated collection system. In addition,
delinquent tax revenues generated by Office Collections staff have continued to be at least
$ 17.5 million higher than fiscal year 1990 levels in fiscal years 1992 through 1995.
") We first reviewed BOR1s delinquent tax collection function in 1985 ( Auditor General Report 85- 8).
Follow- up concerning findings and recommendations from this report was included in our 1988 audit.
1988 Findinflecommendation: DOR's phone collectors made calls only between 8 a. m.
and 5 p. m. on Monday through Friday. We recommended that DOR extend its phone
collections hours and schedule staff to work into the early evening and on Saturday
morning in order to improve its telephone contact rate.
Follow- Up: After our report was issued, DOR began calling delinquent taxpayers between
8 a. m. and 8 p. m. on weekdays and 8 a. m. to 12 noon on Saturdays. Currently, DOR has
20 collectors working in the early evenings and 10 working on Saturday mornings. In
addition to extending the hours in which collectors can attempt to contact delinquent
taxpayers, DOR management believes this effort has led to expanded customer service
and increased callbacks during regular business hours.
1988 Finding/ Recommendation: DOR could collect additional revenue by more
aggressively pursuing currently unlocated accounts ( skip- tracing). At the time, DOR had
committed only 2 FTEs to resolving these accounts and completed fewer than 5,000 skip-traces
annually. We made several recommendations in the skip- tracing area. Most
importantly, it was recommended that DOR devote more staffing resources to its skip-tracing
function. In addition, it was recommended that DOR develop, when possible,
automated skip- tracing procedures to replace those performed manually. Finally, a
recommendation was made that DOR consider using private vendors to assist in locating
delinquent accounts.
Follow- Up: A skip- tracing unit was formed in late 1988 and currently has 14 FTEs. For
the past 3 years, DOR has averaged over 37,000 successful skip- traces annually. Currently,
there are a number of automated procedures in use, including on- line access to
information from the Motor Velucles Division ( MVD), the Department of Economic
Security ( DES), the Corporation Commission, and the Internal Revenue Service ( IRS).
Contrary to our recommendation, DOR does not use private vendors to assist in locating
delinquent accounts. DOR found that it is more cost- effective for DOR to perform skip-tracing
internally at this time.
1988 Findinflecommendation: DOR could improve supervision and training to increase
collector productivity and compliance with collection guidelines. We recommended that
DOR require collection supervisors to increase their review of collector performance and
take corrective action when deficient performance is noted. Specifically, supervisors should
monitor and review collector productivity, adherence to DOR guidelines, and use of
proper phone collection techniques.
Follow- Up: A formalized two- step monthly review process was established in 1989 to
measure adherence to guidelines and proper phone collection techniques. Reviews include
periodic monitoring of collector phone calls and examination of account records.
Supervisors meet with collectors each month to discuss their performance. The current
review, however, found significant noncompliance with some collections guidelines.
Managers also need to increase their oversight to ensure collectors comply with guidelines
( see Finding I, pages 5 through 14).
1988 Finding/ Recommendation: DOR provided neither formal training concerning
proper telephone collection techniques nor consistent on- the- job training. It was
recommended that DOR include telephone collection techniques in its new collector
training program instruction. In addition, on- the- job training should be consistent for all
staff.
Follow- Up: Telephone techniques training began in 1988 and has been updated since that
time. All new employees take this class within their first four months of employment.
h addition, a refresher course is offered for experienced collectors. A formalized on- the-job
training program for field and office collections is also in effect and is conducted by
trained facilitators.
Scope and Methodology
Audit work focused on how DOR can reduce the increasing gap between its delinquent tax
account inventory and the amount of money actually collected. This report presents findings
and recommendations in four areas:
The need to strengthen delinquent tax collection enforcement.
The need to increase staff in the Field Collections Unit to address increasing collector
caseloads.
The need to utilize database match- offs to improve taxpayer compliance.
The need to use debtor information to customize debt collection efforts.
This analysis utilized a variety of methods, including extensive interviews with representa-tives
from private collections firms and tax collection agencies in other states. To assess DOR's
success and use of available enforcement tools, 200 levy files and 120 lien files out of those
issued in June 1994 were randomly sampled. In addition, a comprehensive review of 120
cases that entered collections in fiscal year 1993 was performed. A comparison was also made
between computerized data from DOR and the Arizona Department of Administration ( DOA)
to assess state employees' and vendors' tax compliance.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Director of the Department of
Revenue, the Assistant Director of the Compliance Division, and their staff for their
cooperation and assistance throughout this audit.
FINDING I
BETTER USE OF EXISTING ENFORCEMENT
TOOLS AND ADOPTION OF NEW COLLECTION
METHODS COULD ENABLE DOR TO COLLECT
MILLIONS MORE IN DELINQUENT TAXES
DOR can more effectively utilize its delinquent account enforcement options, and adopt
innovative collections techniques successfully used in some other states. Because DOR
collectors have not followed levy guidelines in many cases, as much as $ 2.6 million in
collections revenues remain uncollected. In addition, untimely filing of liens has left millions
of dollars in state tax debt unprotected, leaving the State susceptible to large losses should
debtors liquidate assets. Finally, reducing the number of defaulted payment agreements
through the use of new collection methods could increase the amount collected from tax debt
by millions annually.
Only a Few Severely
Delinquent Taxpayers
Subject to Enforcement Action
DOR's enforcement powers are only used on a relatively small number of businesses and
individuals who refuse to pay taxes voluntarily. Ninety- five percent of revenues received
by DOR ( excluding property taxes) are paid voluntarily. Those who do not pay on time
generally receive a series of three to ten billing notices prior to being assigned to the
Collections Section, depending on the amount of the debt. Even after debtors enter the
collections process, they are typically mailed additional letters, attempts at phone contact
are made, and they are encouraged to make payment arrangements. Therefore, severely
delinquent debtors are given multiple opportunities to comply before enforcement action
is considered. In these cases, enforcement action is necessary to resolve the debt. Appropriate
use of enforcement also encourages voluntary compliance with tax laws. According to the
federal Internal Revenue Service ( IRS), " the knowledge that enforcement is possible and does
happen stimulates all taxpayers to comply with the law."
Inconsistent Application
of Levies May Leave
Millions Uncollected
A substantial amount of potential tax revenue may be left uncollected each year due to
noncompliance with levy guidelines. Most levies were not issued according to DOR
guidelines. Failure to consistently follow levy guidelines and file levies in a timely manner
may result in as much as $ 2.6 million going uncollected annually. To improve adherence
with DOR requirements, the Department should strengthen its oversight of collector actions.
In addition, DOR should also take steps to ensure that required levy source checks are
completed prior to attempting multiple bank ( mass) levies. Finally, DOR should also consider
automating the levy issuance process when a new automated collection system is acquired.
Levies recover revenue when volunfa y efortsfail - DOR uses levies to recover delinquent
taxes when voluntary compliance efforts have proved unsuccessful. A levy is the seizure
of taxpayers' liquid assets in the possession of employers and financial institutions to satisfy
an unpaid tax debt. DOR is entitled to receive proceeds from a taxpayefs paycheck, minus
deductions for self and dependents, to offset liabilities. Guidelines authorize collectors to issue
levies when debtors have been found to be uncooperative, have broken agreements to pay
monies owed, or are in jeopardy situations, such as an impending bankruptcy.(')
If collectors cannot identify a debtor's bank account or place of employment, they may issue
a multiple bank ( mass) levy to two or more banks withm the debtor's area of residence or
business in an attempt to locate an active bank account. When issuing mass bank levies,
collectors must also have reviewed Arizona Department of Economic Security ( DES)
employment records and credit bureau reports within the last 90 days and 6 months,
respectively. This should be done prior to the levy to determine if a specific bank or employer
levy source is available.
Levy guidelines seldoln followed - DOR collectors often do not follow Department
guidelines when filing levies. A statistically valid sample of 200 accounts levied by DOR in
June 1994 revealed that collectors followed guidelines in slightly less than 25 percent of the
cases examined. In 43 percent of all cases, DOR staff waited an excessive length of time to
file the levies. In these cases DOR collectors did not file a first levy for a median of 110 days
after the accounts were eligible for enforcement action. The remaining levies reviewed ( 32.5
percent) were done before all requirements for issuing a levy were met. The most frequent
requirement not met ( 46 of 65 cases) involved mass bank levies that were issued without
either the required DES search or credit bureau check. The case examples below illustrate
the effects of collectors not complying with levy guidelines.
A debtor entered the collections process in June 1991 owing $ 413 in delinquent income
tax. Collectors first contacted the debtor in July 1991 and a payment agreement was
established. The debtor broke his promise to pay after making just one installment.
Collectors contacted the debtor again in November of 1991 and authorized a second
DOR guidelines authorize collectors to classify debtors as uncooperative when they have failed to
respond to a final demand letter and at least two telephone messages, or indicated during telephone
or field contact that they will not cooperate to resolve the account. The guidelines also authorize
immediate levy action when debtors break a promise to pay all, or a portion, of the amount owed after
providing at least a five- day grace period.
payment agreement, which was also broken. Over the next two- and- a- half years, the
debtor was allowed to enter into eight additional payment agreements, breaking promises
to pay each time. DOR did not place a levy on the account until June 1994, three years
after it entered the collections process. Although the bank levy yielded only $ 16, the
debtor paid the remaining liability shortly after enforcement action was taken.
A business debtor with a long history of making tax payments and filing returns late
entered collections in March 1994. The debtor's liabdity quickly grew to $ 3,822. The debtor
agreed to pay the balance in full in April 1994 and collectors advised that a levy would
be issued if the payment was not received. However, although full payment was not
received, no levy was ever issued, even though a potential bank levy source was recorded
in the file and a 1989 levy was successful in resolving a previous delinquency. The
account, with a remaining balance of $ 1,435, was still open at the time of review in May
1995, more than a year after entering the collection process.
$ 2.6 million may be lost annually - Failure to follow DOR levy guidelines may result in
lost revenue totaling as much as $ 2.6 million annually. As part of the review of a statistically
valid sample of 200 accounts levied in June 1994, the effectiveness of levies done according
to Department guidelines was compared with those done without following the guidelines.
Levies done according to the standards were much more successful in capturing the monies
owed than those in which Department guidelines were not followed. Specifically the analysis
showed that 29 percent of the cases in which guidelines were followed captured all monies
owed the State, while only 13 percent of the cases done without adhering to the guidelines
captured the delinquent taxes. When guidelines were followed, levies brought in an estimated
$ 236 per account. In contrast, levies issued when guidelines were not followed brought in
an estimated $ 136 per account. DOR issued a total of 32,649 levies in fiscal year 1994. If DOR
had followed the guidelines in these cases, as much as $ 2.6 million more in delinquent taxes
could have been collected.
Inzyuoveinents to lemjfunction needed - DOR could improve the effectiveness of levies in
the short term by strengthening management oversight and in the long term by automating
the levy determination process. To address widespread noncompliance with levy guidelines,
DOR needs to take steps to improve oversight of collector actions. Supervisors need to more
closely monitor collection accounts to ensure that levies are issued in a timely manner.
Collection supervisors are responsible for periodically reviewing collection accounts to assess
staff compliance with DOR guidelines. However, as noted above, these efforts failed to either
spot or correct compliance problems. DOR management agrees that improved oversight is
needed and believes that additional supervisory positions must be allocated to improve the
span of control. The Department should evaluate existing supervisory oversight and assess
1) whether adequate improvements can be made with available resources or 2) additional
supervisory positions are needed.
DOR can also improve the effectiveness of the levies it issues by taking steps to ensure that
all levy source checks are performed prior to issuing mass levies. Mass levies are sent out
to two or more banks within a geographical area when DOR has not identified a specific
levy source for debtors. The Department has increasingly used mass bank levies in recent
years. In fiscal year 1989, mass levies accounted for only 12 percent of the 18,480 total bank
levies. By fiscal year 1994, nearly 57 percent of the 16,089 bank levies filed by the Department
were mass levies. According to agency officials, the use of mass levies has increased in an
attempt to take a stronger enforcement stance. However, although mass levies should be
done only after a credit bureau check and DES employment search are completed, they are
often performed without these steps being taken to identdy potential wage or bank levy
sources. This adds unnecessary processing costs to financial institutions and to DOR's levy
unit. Financial institutions must research and respond to all DOR levy requests, even when
the debtor has no account with the bank. In addition, DOR's levy unit must produce levy
documents for as many as six banks when mass levies are requested.
Automating levy issuance is a long- term solution to DORss noncompliance problem.
Acquiring a new automated collection system, as discussed in the Other Pertinent Information
section ( see pages 31 through 32), would enable DOR to ensure that levies are done according
to guidehes by programming the system to automatically route accounts to the appropriate
staff when levy requirements are met. Since the early 1980s, the California Franchise Tax
Board has used a collections system that issues both wage and bank levies automatically.
The system, recently upgraded, allows California to resolve approximately 80 percent of its
delinquent income tax accounts prior to collector action.
Failure to Follow Lien
Guidelines Leaves Tax
Debts Unsecured
Collector noncompliance with lien guidelines frequently leaves tax debts unsecmd. Although
liens are an important tool to protect the State's interest in delinquent tax cases and leverage
compliance with tax requirements, liens often are not filed in accordance with DOR policies.
As a result, millions of dollars in potential state revenue may be left unsecured each year.
Improving management oversight, automating lien issuance, and reducing the predetermined
level for issuing liens would better protect the State's financial interests.
A. R. S. $ 542- 1821 through 42- 1822 authorize DOR to file liens whenever delinquent taxes are
owed the State. DOR can file property liens with the county recorder in each of Arizona's
15 counties and the Arizona Office of the Secretary of State to secure tax liabilities. Since liens
are attached to real property, debtors are unable to buy, sell, or borrow against property
within the county until the lien is resolved. In addition, a lien filed with the Secretary of State
limits businesses from financing receivables, inventory, or equipment because lenders would
not be able to ensure that they would be repaid if the business defaults.
Department guidelines require liens to be filed on accounts with balances of $ 750 or more
if the debtors have not made arrangements to pay the balance in full within 30 days for
business accounts or 90 days for individual income tax accounts. DOR guidelines authorize
collectors to place liens on accounts with balances between $ 100 and $ 750 after obtaining
supervisory approval.
Lien guidelines not followed consistently - Collectors often do not file liens according
to DOR guidelines. We reviewed a statistically valid sample of 120 lien cases issued in June
1994 and found that many were filed well after the lien guidelines had been met. Specifically,
our analysis showed that in 40 of the 120 cases ( 33 percent), liens were issued late. Liens were
not filed on these accounts for a median of 155 days after they became eligible for ths
enforcement action. Liens issued on business tax accounts were more likely to be filed late
than those on individual income tax accounts. In nearly half of the 60 business tax cases we
examined, liens were not issued as soon as the guidelines allow. The following case example
illustrates the effect of DOR's failure to adhere to lien guidehes.
A business debtor entered collections in February 1992 with a liability of $ 2,960. Although
collectors left five messages for the taxpayer, the taxpayer did not respond. During ths
time, the debtor's tax liability increased to $ 5,929. Collectors finally reached the debtor
in June 1992. Although the debtor agreed to pay the balance in full in July 1992, no
payment was received and the liability increased further to $ 7,443. Collectors contacted
the debtor to advise that a lien would be filed. However, collectors again allowed the
taxpayer to set up a payment agreement and no lien was filed. This promise to pay was
also broken. A lien was not filed on the account untd February 1993. As a result, this state
tax debt was left unsecured for one year.
Millions of dollars left unsecured - Untimely lien issuance leaves millions of dollars in debts
unprotected each year. As mentioned above, in the 40 cases in which liens were filed late,
liens were not requested for a median of 155 days after they were eligible for enforcement
action. The median dollar value of the liens filed in these cases was $ 2,541. Based on the
sample results, we estimate that late filing of liens in fiscal year 1994 resulted in a total of
approximately $ 19 million being unsecured for at least a portion of the year. 0) It is critical
that DOR file liens as soon as possible because debtors may owe money to multiple creditors.
If the taxpayer begins to liquidate real assets ( e. g. property or capital equipment), only those
The estimated dollar value of tax debts left unsecured for a portion of the year was determined by
extrapolating the results of our statistically significant sample, which found that 33 percent of the liens
were left unsecured. The median value of the tax debt owed was $ 2,541. Thirty- three percent of the
total lien population was 7,504 liens. This number of liens times the $ 2,541 median tax debt owed equals
approximately $ 19 million in tax debt left unsecured for a portion of the year.
creditors with liens on the item or property will be entitled to receive proceeds from the sale.
Therefore, filing a lien protects the State even if the taxpayers default on promises to pay
their debts and begin to sell their assets.
Changes needed to improve lien process - DOR could better protect the State's financial
interests by improving management oversight, automating lien issuance, and reducing the
minimum dollar amount for issuing liens without supervisory approval. Current efforts to
monitor collector compliance with lien guidelines are inadequate. As previously mentioned,
liens were filed late in one- third of the reviewed accounts. This high level of noncompliance
occurred despite the fact that collectors are rated on their compliance with lien guidelines
and noncompliance with these guidelines is considered by the Department to be a " serious
error." As with levies, DOR management agrees that management oversight can be improved
and suggests that additional supervisory personnel are needed.
Automating the lien function would improve consistency in the application of lien guidelines.
As discussed in the Other Pertinent Information section of the report ( see pages 31 through
32), DOR's current automated collection system lacks the capacity to determine when lien
requirements have been met and automatically route accounts to the appropriate staff for
action. New systems are available that can be programmed to make lien determinations and
perform necessary routing. Automation of lien determination has been accomplished in
several other states. Virginia automatically generates liens 75 days after accounts enter
collections. The California Franchise Tax Board has an automated collection system that will
automatically file liens if the debtor fails to resolve the liabihty with a full payment or
approved agreement, Maryland has had an automatic feature for liens on its income tax
collection system since May 1994. After 180 days in the collections process, Maryland's system
automatically files a lien on every account over $ 500. A Maryland official stated that
automating the lien function has been effective in encouragmg payment and, in turn, closing
accounts. This feature has also added uniformity to its collection efforts. Prior to automating
its lien function, Maryland relied on individual collector discretion in interpreting filing
guidelines. As DOR considers acquisition of a new automated collection system, it should
ensure that the system has the capacity to automate lien determination.
The Department should also consider lowering the minimum dollar amount for issuing liens
to better protect the State's interest in delinquent tax cases. As mentioned above, DOR
guidelines require collectors to obtain supervisory approval before f i g liens on accounts
with balances less than $ 750. DOR seldom issues liens when account balances are below ths
level. Four states surveyed and DES have lower requirements for filing liens that range from
$ 100 to $ 500.(') For example, DES' Unemployment Insurance Tax Section routinely liens all
accounts over $ loo.(') Reducing the lien threshold to $ 500 could result in securing as many
as 10,000 debts valued at $ 6.1 million.
These states are Florida, Illinois, Maryland and Texas.
DES is responsible for administering the state unemployment tax collection program for Arizona.
10
Reducing the lien threshold will, however, impact DOR's budget. The fees charged to file
liens with the counties and Secretary of State range from $ 3 to $ 7. In addition, it typically
costs the Department $ 3 to have liens released. Although A. R. S. 542.137.01 provides the
Departments with authority to recover these costs from the taxpayers, any monies recovered
go to the General Fund. Therefore, DOR pays these fees from its budget. If more liens are
issued, DOR will need additional funding to cover the cost.
Payment Agreement Noncompliance
Results in Uncollected Tax Debts
In order to encourage voluntary compliance and reduce defaults that lead to enforcement
action, DOR could improve its payment agreement process. Although DOR relies heavily
on payment agreements to collect tax liabilities, these agreements are frequently broken by
taxpayers, with milhons of dollars in potential tax revenue left uncollected. In addition, even
when debtors have had a history of breaking promises, collectors often continue to allow
new agreements to be made. The Department could minimize the payment agreement default
rate and collect millions more annually by requiring automatic withdrawal for those with
bank accounts and accepting credit cards for payment of smaller tax debts.
The Department frequently uses payment agreements as a tool to collect delinquent taxes.
Debtors entering the collections process are generally given the opportunity to establish
payment agreements with DOR to resolve their tax liability. At any time, a substantial
number of debtors are on payment agreements. For instance, in March 1995 approximately
26,500 collections accounts were on payment agreements. In total, these accounts were valued
at nearly $ 39 million.
Few taxpayers coinply witlz pay~ nent agreentents - Delinquent taxpayers on payment
agreements often break their promises to pay taxes owed the State, resulting in mdlions of
dollars in tax liabilities un~ ollected. I~ n~ r) e viewing a judgmental sample of cases entering
collections in fiscal year 1993, it was found that approximately 50 percent of agreements made
by debtors were broken before the balance was paid in full. A statistically valid sample of
cases with liens filed in June 1994 was also reviewed and it was found that approximately
80 percent of all promises were broken.
Even when promises are broken, DOR frequently allows taxpayers to establish subsequent
payment agreements. Of the 43 cases with payment agreements in our fiscal year 1993
sample, 22 were set up on a second agreement and of those, 11 had 3 or more payment
agreements. One taxpayer was allowed to make 12 separate payment agreements while in
collections. In contrast, three states that we surveyed took enforcement action if a taxpayer
broke two payment agreements. Two states allowed only one broken promise before
DOR considers a promise broken if: ( a) less than 90 percent of the payment due is received; ( b) the
payment is received 12 to 18 days after the due date depending on the tax type; and ( c) a new liability
enters the collection process.
enforcement.(') Our research shows that those with multiple broken promises are less likely
to pay off their tax liability in full, indicating that the fewer promises broken, the greater
the percentage paid of what is owed.
Many broken promises result in less revenue collected - The high default rate on payment
agreements entered into by delinquent taxpayers leaves a substantial amount of potential
revenue uncollected, and prolongs the collection process. As mentioned above, in March 1995
approximately 26,500 accounts, with a total value of nearly $ 39 million, were on payment
agreements with the Department. Although it is difficult to determine the amount of money
that went uncollected because of broken promises ( due to variation in the length of payment
agreements and when during the course of agreements promises are broken), it is clear that
millions of dollars are left uncollected. The case example below illustrates the effect of broken
promises on payment agreement effectiveness.
A business debtor entered the collection process in January 1992 owing $ 195 in sales tax.
Collectors first contacted the debtor in February 1992 and an agreement was made to
pay the liability in full. The payment was not received when due. The taxpayer was set
up on four additional payment agreements between March and August 1992. Promises
to pay were broken in each instance. Further tax liabilities were incurred by the debtor
throughout this period, and by September 1992 the balance due increased to $ 10,190. The
debtor made a string of sporadic payments, reducing hs liability to $ 1,254 in April 1993.
However, the liability then increased because the debtor did not submit payment when
returns were filed. DOR continued to set up payment agreements with the debtor and
no levies were attempted until August 1993, when a bank levy brought in $ 2,965. This
account was still active at the time of our review, with an unpaid balance of $ 19,375.
Installment agreements are broken primarily because payment is voluntary and agreements
are long- term. The voluntary nature of payment agreements leads to a high broken promise
rate. Under DOR's current system debtors are responsible for sending in a check with their
payment each month, rather than having payments deducted automatically from their bank
account. In addition, our review of payment agreement data showed that agreements with
longer terms were more likely to be broken than those with shorter terms. DOR staff recently
examined a sample of 289 Office Collection accounts on payment agreements. Their research
indicates that in 59 percent of these cases, payment agreements exceeded a year in length.
In addition, 26 percent of the cases were for longer than three years. The DOR study
concluded that the lengths of many payment agreements are " far outside the realm of
reasonableness."
Maryland, Minnesota, and Virginia gave two chances; Illinois and Texas gave only one chance.
Steps needed to reduce the broken promise rate - Compliance with payment agreements
could be improved in a variety of ways, including:
Requiring automatic withdrawal - Compliance with payment agreements could be
improved signhcantly by mandating use of automatic withdrawal for those with bank
accounts. Automatic withdrawal payments are received directly from banking
institutions without taxpayer involvement The use of automatic withdrawal is common
in private sector installment agreements. Many mortgage, automobile, and student loan
payments are made in this way. To address voluntary compliance problems, the
Minnesota Department of Revenue initiated an automatic withdrawal program for
payment agreements in 1993. After 15 months Minnesota found that 65 percent of those
with automatic withdrawal had paid in full, while only 18 percent of taxpayers on
voluntary payment agreements had paid in full. In addition to a dramatic increase in the
compliance rate, Minnesota officials indicated that the automatic withdrawal program
also has reduced administrative and clerical work because fewer checks must be
processed and less correspondence with the taxpayer is needed.
Monitoring payment agreement length - Improved management oversight is needed
to ensure that payment agreement lengths are reasonable. DOR's typical payment
agreement standard timeframe is 12 months or less. However, DOR now allows
payment agreements up to three years in length for some debts under $ 5,000. In practice,
payment agreements often have even longer terms. DOR management should more
closely monitor payment agreements to ensure that the number of installments and the
installment amounts are appropriate.
Allowing credit card payments could enhance collections - Accepting credit cards
for smaller tax debts would enable DOR to reduce reliance on payment agreements and
increase dollars collected. DOR currently does not accept credit cards for any tax
payments. The Federation of Tax Administrators has identified 12 states that accept
credit cards for tax payments. Ten of these states accept credit cards for delinquent tax
payments. The Governmental Finance Officers Association ( GFOA) supports use of
credit cards for state and local government tax payments. The GFOA reports that
accepting credit cards accelerates payment and reduces the cost of collecting monies
owed. Oregon has accepted credit cards as a method of payment for delinquent taxes
since 1990. An Oregon administrator stated that approximately 1,000 taxpayers utilized
this service during fiscal year 1994, allowing the collection of about $ 1 million in
revenues annually. In Arizona, if credit card payments were permitted for liabilities up
to $ 1,000, many accounts could be paid in full rather than being placed on an installment
agreement As of July 1995 there were 71,971 collections accounts assigned to the Office
and Field Collections Units, valued at approximately $ 22.9 million, with balances less
than $ 1,000.
DOR would need additional statutory authority to absorb credit card fees for delinquent
tax debts. Banks processing credit card transactions charge a fee of 1.5 to 3 percent for
credit card use. Credit card companies, such as Visa and Mastercard, generally do not
allow those accepting the credit card to pass the fee along to the cardholder. Six states
have obtained authority to pay the fee, which, at 1.5 to 3 percent, is generally less than
DOR's cost of collecting delinquent tax accounts.
RECOMMENDATIONS
1. The Legislature should consider providing DOR statutory authority to allow the
Department to deduct applicable credit card fees from the tax payments received.
2. The Department should take the following steps to increase the effectiveness of
enforcement tools.
~ s Improve management oversight of collector compliance with DOR lien and levy
guidelines.
Ensure that required levy source searches are done prior to issuing mass levies.
m Reduce the dollar threshold required to file liens without supervisory approval.
3, As the Department considers acquiring a new automated collections system, it should
ensure that systems under consideration are capable of automating levy and lien
determination.
4. The Department should require automatic withdrawal for delinquent taxpayer payment
agreements, where available.
5. The Department should monitor payment agreements to ensure that the number of
installments and the installment amounts are reasonable.
FINDING II
INCREASED STAFF COULD RESULT
IN COLLECTION OF AN ESTIMATED
$ 6.6 MILLION IN ADDITIONAL
DELINQUENT TAX DEBTS
The Arizona Department of Revenue needs to increase collection staff to address the
growing number of delinquent tax accounts and increase the tax debts it collects. Although
the total dollar value of delinquent tax accounts entering the collection process has increased
93 percent since fiscal year 1989, amounts collected each year from these debts have
experienced little or no growth during ths period. The number of delinquent accounts
assigned to field collectors has become excessive and needs to be addressed. Increasing staff
in the Field Collections Unit would reduce the number of accounts assigned to collectors
and could enable DOR to increase the tax debts it collects by an estimated $ 6.6 million
annually.
Delinquent Tax Collections
Not Keeping Pace with
Increasing Number of Accounts
Increasing numbers of delinquent accounts have outpaced DORIS ability to collect them.
DOR's workable delinquent tax account balance that could feasibly be collected has risen
from $ 106 million to $ 205 million in the past six fiscal years. In contrast, the amount of
delinquent taxes collected has plateaued at approximately $ 125 million over the same time
period. Much of the growth in delinquent tax accounts is attributable to DOR's increase in
audits performed during the early 1990s. The growing number of delinquent tax accounts
has resulted in backlogs in the later stages of the Department's collections process and aging
accounts that are more difficult to collect.
Delinquent accounts increasing while collections remains the same - DOR's collections
efforts have not kept up with its increasing delinquent account numbers or balance. Over
the past six fiscal years, the delinquent account balance that could feasibly be collected has
grown 93 percent.(') DOR's collections efforts, however, have plateaued at $ 125 million
annually over those same six fiscal years. Historically, DOR has been able to collect a larger
(') Bankruptcy accounts were excluded because DOR has no authority to collect them. DOR determined
" uncollectible" accounts were also excluded because the Department cannot collect them for various
reasons, such as no addresses, etc.
percentage of delinquent taxes owed. However, this percentage has declined as the number
of accounts has increased. Figure 1 illustrates the increase in DOR's delinquent account
balance versus the dollars collected from these debts since fiscal year 1989.
Figure 1
DOR Collection ~ ecounts(~)
Total Year- End Balance Due vs. Dollars Collected
Fiscal Years 1989 through 1995
0
1989 1990 1991 1992 1993 1994 1995
Fiscal Year
I ITo tal Year- End Balance Due Dollars Collected
(") These figures exclude bankruptcy and DOR- determined " uncollectible" accounts.
Source: DOR delinquent account year- end balance and collection data for fiscal years 1989 through 1995.
16
Several reasons for increasing numbers of delinquent tax accounts - The growing number
of delinquent tax accounts can be attributed to a variety of factors. First, an increase in the
number of audits conducted by the Department has led to a significant increase in
dehquent tax accounts. The number of audits rose from 28,354 in fiscal year 1989 to 116,796
in fiscal year 1994, a 312 percent increase. Audit cases not resolved voluntarily or through
negotiations are eventually forwarded to the Collections Section. Audit- related receivables
now account for 38 percent of all receivables in the collection process. Second, Arizona's
rapid population growth has also contributed to the growing number of delinquent tax
accounts. Between fiscal years 1989 and 1995 Arizona's population increased approximately
16 percent. Finally, DOR management also cites the transient nature of Arizona's population
as a reason for the increase in accounts entering the Collections Section. According to DOR,
accounts for individuals living in Arizona only seasonally or staying a short time are
difficult to pursue and collect. During the same period, the Collections Section has
experienced relatively little staffing growth to absorb the extra cases.
Backlog and aging accounts - The increase in delinquent accounts has caused backlogs in
the later steps in the collections process and has resulted in accounts aging with little or no
action taken.
Much of the growth in delinquent accounts has particularly impacted workloads in the later
stages of the collection process: field collections; accounts referred to a private collection
agency; and those deemed uncollectible.(') In fiscal year 1991 these three areas accounted for
only 19 percent of all cases in the collections process. In fiscal year 1995, these same areas
comprised 41 percent of all accounts assigned to the Collections Section. During this period,
Field Collections accounts have risen from 7,762 to 20,398, accounts referred to a private
collection agency grew from 10,701 to 27,880, and uncollectible accounts increased from
8,343 to 21,199. Increases in the number of delinquent accounts in the Office Collections
Unit, which is responsible for initial collection efforts for accounts entering the section, has
not been as dramatic since accounts unresolved by collectors in this unit can be forwarded
to Field Collections or a private collection agency. In addition, the Office Collections Unit
has added 28 staff in the last 5 years and in 1994, due to a backlog in Office Collections,
management transferred 10,000 accounts to Field Collections and a private collection agency.
Accounts entering the collection process generally are assigned first to the Office Collections Unit.
Collectors attempt to make telephone contact to request payment or set up an installment agreement.
In instances when taxpayers refuse to pay or fail to adhere to the terms of payment agreements,
collectors attempt to enforce collection through use of liens and levies. Accounts unresolved by Office
Collections Unit staff are typically forwarded to either DOR's Field Collections Unit or a private
collection agency for further collection efforts. The Field Collections Unit receives in- state accounts
with balances due of $ 200 or more. Field collectors may file liens and levies, make field visits, and
conduct seizures in their efforts to resolve tax debts. A private collection agency attempts to collect
in- state tax debts less than $ 200 and most out- of- state accounts. If field or private collectors cannot
resolve tax delinquencies, accounts may be deemed uncollectible.
Because DOR has been unable to keep pace with delinquent tax accounts entering the
collection process, accounts have aged and, as a result, can become more difficult to collect.
Many of the accounts currently assigned to the Collections Section have been in the
collection process for years. For instance, nearly half of all delinquent tax accounts have
receivables with money due from 1991 or before. As accounts age, the possibility of
collecting the tax debts decreases because taxpayers may move and be difficult to locate, or
companies may go out of business.
Additional Staff Needed
to Address the Increasing
Number of Collection Accounts
DOR needs to increase its collection staff to address the growing number of delinquent tax
accounts. Collector caseloads in the Field Collections Unit have become excessive whle
staffing levels and the dollars collected have not increased. Adding 18 new field collector
positions would reduce caseloads to a more manageable level, and could enable the
Collections Section to increase the money collected from tax debts by $ 6.6 million annually.
Collector caseloads umnageable - Field collectors cannot adequately manage current
caseloads. Since fiscal year 1990, the number of accounts assigned to the Field Collections
Unit has grown 272 percent. Due to the unit's rising caseload, the average number of
delinquent accounts per collector has increased from 183 to 583 between fiscal years 1990
to 1995. Furthermore, many collectors have caseloads well above these levels. As of April
1995, ll of the 35 collectors had caseloads greater than 750, and 2 of these had caseloads in
excess of 900. In contrast, the IRS assigns no more than 109 cases to experienced field
personnel. Other states also assign fewer cases to field collectors. A survey of five other
states found that their field collector caseloads ranged from 100 to 300 cases.(')
Excessive caseloads make it dlffrcult for field collectors to take the actions needed to resolve
many of their assigned cases. Due to excessive caseloads, agency management has instructed
its field collectors to focus their efforts on accounts with balances greater than $ 5,000. These
cases comprise only 18 percent of all accounts assigned to the Field Collections Unit.
However, on average, field collectors have 96 accounts over $ 5,000 assigned to them.
According to supervisors and staff, there is little time to work on accounts with balances
less than $ 5,000. If accounts cannot be resolved in field collections they may eventually be
classhed as uncollectible, contributing to the significant growth in the uncollectible inventory.
Collection and stafling levels stagnant - Field collection staffing has remained constant at
35 collectors for the past 5 years and tax debts collected by the unit have plateaued at
approximately $ 21 milhon. Although the number of cases assigned to the Field Collections
(" States surveyed involved Colorado, Florida, Illinois, Texas, and Virginia.
18
Unit nearly tripled between fiscal years 1990 and 1995, no new staff were added during this
period.
Recognizing that field collector caseloads are excessive, DOR recently created several new
field collector positions. During the course of our audit, the agency authorized a transfer of
six Individual Income Tax Audit Section positions to the Field Collections Unit. As a result,
the average field collector caseload dropped from 583 to 498 at the start of fiscal year 1996.
Staffincreases needed - Although DOR has taken steps to begin addressing excessive field
collector caseloads, further staffing increases are needed. Agency management believes each
field collector can manage approximately 300 to 350 cases. An additional 18 field collectors
are needed to lower the average caseload from 498 to approximately 350.~' T) his would raise
the total number of field collectors to 59. The estimated cost of adding collection staff is
approximately $ 870,000 in the first year.( 2) H owever, the cost of adding new field collectors
may be reduced if positions can be transferred from other areas within the Department. As
mentioned above, DOR recently transferred positions from the Individual Income Tax Audit
Section to the Field Collections Unit. Further interagency transfers to the Collections Section
may be feasible, which could reduce the cost of adding collection staff.
Adding field collector positions would enable DOR to significantly increase the amount of
revenue collected by its Field Collections Unit. In fiscal year 1994, the median amount
generated by field collectors over the entire year was $ 667,000. The minimum amount
collected by a field collector during this period was $ 413,000. If each of the new collectors
generated $ 413,000, they could collect a total of $ 7.4 million annually. This would result in
an estimated net collection of $ 6.6 million annually.
DOR needs to utilize a staged approach to implement staffing changes. According to DOR
management, the addition of 18 field collectors, 2 supervisors, and 2 support staff will impact
its collections processes. For example, office collectors will apply for field collector positions
and field collectors will apply for the supervisor positions. In addition, if DOR is able to
provide these additional positions internally through downsizing another functional area
rather than through a budget request, additional personnel changes would occur. Based on
the need to better ensure that collectors are following lien and levy guidelines, DOR
expressed concern that their numbers of collectors- per- supervisor ratio may be too high. We
did not, however, conduct audit work to determine this. Because of these factors, DOR will
need to plan for and execute the changes needed to add more collectors over a period of
time to ensure minimal disruption of operations.
We recommend adding only 18 collectors because we believe that recommendations for improved
enforcement in Finding I will decrease the number of cases referred to the Field Collections Unit, and
further reduce collector caseloads.
( 2) This estimate includes 18 field collectors, 2 supervisors, and 2 support staff. Employee- related
expenditures of 24 percent and travel costs have also been accounted for. In addition, the estimate
includes a one- time cost of $ 99,000 for needed office equipment.
RECOMMENDATION
To address excessive field collector caseloads, BOR should request additional funding for
18 additional field collectors. However, the Department may be able to minimize the cost
of new collector positions by transferring positions horn other areas within DOR to the
I
Collections Section.
FINDING Ill
DOR CAN ENHANCE
DELINQUENT TAX COLLECTION BY
USING OTHER STATE AGENCIES' DATABASES
A taxpayer entered DOR's collection process in September 1990 with a balance due of $ 1,1 69.
Unaware that the taxpayer has been a state employee since October 1991, the Department
has never levied the employee's state wages. In addition, by the time of our review in June
1995, the employee's tax debt had increased to $ 2,400.
Using information maintained by other state agencies could help DOR collect more delinquent
taxes. A comparison of DOR's collections database with two of the Department of
Administration ( DOA) payments databases identified over 1,300 state employees and almost
600 vendors who owe nearly $ 4 million in delinquent taxes. Many of these delinquent
taxpayers were not actively paying off their debts. Database comparisons such as the
DOR/ DOA example can help DOR identify income sources that can then be used to either
pay off the debt or establish a payment agreement. DOR concurs and has proposed
expanding the concept to compare its database with a Department of Economic Security
( DES ) employer database that contains information on employees of the majority of Arizona's
employers.
Nearly $ 4 Million Owed by
State Employees and Vendors
A comparison of two DOA databases with DOR's found that state employees and vendors
on state contract owed nearly $ 4 million in delinquent taxes. We obtained Department of
Administration employee and vendor data on electronic tape and performed a match- off
with DOR's delinquent account records by comparing the lists of state employees and vendors
to the lists of dehquent taxpayers.
State emplmjees owe considerable back taxes - State employees owe a significant amount
of delinquent taxes, as shown in Table 1 on page 22. Analysis showed that 1,355 state
employees owed $ 1,906,963 in income and business taxes. Although 531 of the delinquencies
were less than $ 200,354 employees had tax debts of $ 1,000 or more. Many of these accounts
have been in the collection process for years. Thirty- seven percent of these accounts, totaling
over $ 1.2 million, date from 1992 or earlier. This case example illustrates difficulties DOR
may have collecting delinquent taxes without having other information provided by a
database match- off.
In July of 1994, DOR attempted to levy the wages of a taxpayer who owed over $ 2,000
in delinquent taxes and whose account had been assigned to the Collections Section since
1990. However, the taxpayer was no longer employed at the company to which the levy
was mailed. At the time of this levy, the taxpayer was employed by the State, and had
been for over three months. The employee's state wages have never been levied.
Delinquent Taxes of State Employees and Vendors
as of April 1, 1995
State State
Employees Vendors
Total Dollars Owed
Total Number of Accounts
Dollar Range:
$ 200 or less
Between $ 200 and $ 1,000
$ 1,000 or more
Date Entering the Collection Process:
Before 1990
Between 1990 and 1993
1993 and later
Source: Auditor General staff comparison of DOA employee and vendor data with DOR tax delinquency
data.
Vendors with state contracts have considerable tax delinquencies - Many vendors doing
business with the State also have tax debts. We chose a nine- month period from July 1994
% bough March 1995, and identified those vendors who received payments while they had
tax delinquencies. Five- hundred and eighty- nine vendors owe a total of $ 1,933,898 in
delinquent taxes. The largest single debt is $ 150,181. Two- hundred and twenty- four vendors
each owe $ 1,000 or more, and their total delinquency is $ 1,835,419. A number of these cases
have also been in collections for several years. One- hundred and fifty- one vendor accounts,
valued at $ 921,415, entered Collections before 1993. The following case example illustrates
that vendors could be paying off delinquent taxes with monies received from the State if
DOR were aware of this income source.
A taxpayer has entered the collection system numerous times with balances exceeding
$ 10,000. As of August 1995, the account had a delinquent balance of $ 66,555. During the
nine- month period of the sample match- off, this taxpayer received $ 111,080 in state
payments, none of which were applied toward the liabihty. A match- off program would
have enabled DOR to levy sufficient payments to resolve the account, with no need for
collector intervention.
Many State Employees and Vendors
Are Not Actively Paying Off Their
Delinquent Taxes
Because DOR does not currently obtain the information available through match- offs on state
employees and vendors with delinquent taxes, many of them are not actively paying off the
taxes they owe. Our match- off found that only 49 percent of state employees, ( excluding those
in bankruptcy), with delinquent income or business taxes had a payment arrangement with
DOR. In addition, DOR had placed 47 state employee delinquent accounts in the
" uncollectible" file. The most common reason for this was that these taxpayers could not
be located.(') Further, 152 employee accounts were sent to a private collections agency because
they could not be resolved through internal departmental efforts. If DOR was aware that
delinquent taxpayers and businesses were receiving state monies, it could have accessed those
monies through levies or payment agreements rather than assigning the accounts to private
collectors, who charge a 22 percent collections fee.
Five- hundred eighty- nine delinquent vendors received payments from the State in the sample
nine- month period covered by our investigation. Of these vendors, just 105 - less than 22
percent of those not in bankruptcy - had made payment agreements with DOR. Twenty- five
accounts were classified as uncollectible, and 27 had been sent to outside collections
agencies.(?)
Because DOR does not perform match- offs with other state information, it may be unaware
that state payments have been made that could be used to offset delinquent tax debts. For
example:
Accounts may also be classified as uncollectible in hardship situations, when debtors are incarcerated,
or when corporations become defunct.
( 2) DOR indicated that many of these state employees and vendor accounts are being worked on even
if a payment agreement does not exist.
A delinquent taxpayer began working for the Arizona Department of Corrections in
September 1994, at that time owing a balance of $ 12,280. The account has been in
collection since January 1987. The balance has since grown to over $ 13,000.
DOR assigned the account of a firm owing $ 12,900 to a collection agency in August 1994,
claiming there were no levy sources and that they had exhausted their collection options.
However, the State paid $ 133,345 to the firm between July 1994 and March 1995, including
$ 106,516 after the account was sent to a collection agency.
It appears that the State could collect much of the dehquent tax amounts owed by state
employees and vendors either through direct payment, payment agreements, or account
levies. Income from state employment or contracting for services is a sure source for
collections. In the nine- month period covered by our test match- off, over $ 500,000 was paid
by state agencies to tax delinquent vendors that could possibly have been recovered by DOR
for payment of tax debts. In addition, many delinquent taxpayers owe relatively small
amounts that could either be paid in full or subject to a payment agreement For example,
39 percent of the state employees with delinquent taxes owe $ 200 or less and 35 percent owe
between $ 200 and $ 1,000. The average state employee debt is $ 1,407. The average for state
vendors is $ 3,283. One- hundred and ninety- five vendors owe $ 200 or less and 170 owe
between $ 200 and $ 1,000.
Match- Off Programs Feasible and
Used in Arizona and Other States
Match- off programs can aid in collecting delinquent taxes. DOR currently operates two very
successful match- off programs, and at least two other states run successful programs. Creating
a state employee and vendor match- off program would not be costly. DOR has proposed
expanding the concept beyond just state employees and vendors to all public and private
sector employees, except federal employees, by matching its information against the
Department of Economic Security's ( DES) employer database.
DOR's cuwazt programs - DOR currently operates two successful debt offset programs.
The Department has a program to check whether those scheduled to receive tax refunds
owe dehquent taxes. Before tax refunds are issued, they are automatically offset against
any outstanding tax liabilities from previous years. In fiscal year 1994, $ 3,680,828 in delinquent
income taxes was recouped from 24,357 individual taxpayers while 177 accounts yielded
$ 382,973 in corporate tax. In a second program, DOR checks whether those receiving the
refunds owe money to other state agencies that have filed claims with the Department. Eleven
agencies participate in this DOR program. For example, the University of Anzona submits
claims to DOR for those owing for housing, student loans, and parking. The Department
of Economic Security submits claims for individuals owing chdd support. In the first half
of 1995, this program produced $ 3,540,000 in payments against 25,124 matches.(')
0 t h states - Some other states have successful match- off programs. The Illinois
Department of Revenue's program has been operating since 1986. It covers both individual
and business tax delinquencies and generates up to $ 1 million per year. The match- off in
Maryland has yielded $ 15,000,000 in its 12- year existence. In addition to the obvious benefits,
in each case, officials believe that the existence of the programs also has considerable incentive
effects in encouraging taxpayers to settle their tax liabilities.
Programs not expensive - Setting up and operating an automated match- off program for
state employees and vendors would not be expensive. The debt set- off program currently
administered by DOR cost $ 110,400 to operate in fiscal year 1994. DOR officials estimate that
the programming changes necessary to implement a match- off could be accomplished in
282 to 424 hours of programmer/ analyst time, costing between $ 10,000 and $ 15,000.
DOR proposes an expanded program - DOR has proposed expanding the match- off concept
beyond state employees and vendors to include all employees in the State, except those
working for the federal government. DOR is proposing matching its database against a DES
employer database. The DES employer database lists all non- federal Arizona employers and
employees that are liable for unemployment tax. Therefore, this match- off would identify
wage levy sources for the majority of persons working in Arizona that owe delinquent taxes.
This would include state employees, state university employees, other public sector
employees, and private sector employees. In a letter dated October 30,1995, DOR requested
that DES, begin performing the programming necessary for a monthly match- off. DES has
estimated that the effort will cost $ 4,820 for development and testing and $ 142 for monthly
production costs. For state vendors, DOR agrees that a DOA/ DOR match- off is needed and
reports that it is currently working with DOA to implement such a program.
In 1990, DOR also conducted a pilot match- off program with the Arizona Department of Transportation
and the Arizona Department of Corrections. DOR staff manually reviewed records provided by these
agencies to identify vendors with delinquent sales tax returns or receivables. Although $ 415,733 was
collected from vendors identified through these efforts, the program was discontinued in the first year
because the manual nature of the program was labor intensive and management felt staff time could
be better spent on other collection activities.
RECOMMENDATIONS
I. DOR should develop and implement a program to match payments made to state
employees and vendors on state contracts with state tax liabilities to expedite the
collection of tax delinquencies.
2. DOR should continue development and implementation of a program to identify wage
levy sources by matching its dehquent tax information with the Department of
Economic Security's unemployment tax database of employers and employees.
FINDING IV
DEBTOR PROFILING COULD IMPROVE
THE EFFECTIVENESS OF DOR'S
COLLECTION PROGRAM
DOR could use debtor information to better manage its delinquent tax accounts. Information
about debtors is increasingly being utilized by public and private collection firms in
determining the steps needed to resolve account delinquencies. DOR should consider using
debtor information in the future to enhance the effectiveness of its collection program.
Debtor Profiling Increasingly
Used by Private and Public
Collections Agencies
Information concerning debtor characteristics is now being used to customize collection
efforts. Data regarding debtor characteristics can be utilized to assess the risk associated with
accounts and determine what actions are necessary to resolve delinquencies. Debtor profiling
is being done by private and public debt collection operations, as well as banking and
mortgage institutions that issue loans.
Debtor profiling - Information concerning debtors can be used to improve the effectiveness
of collection efforts. Debtor profiles, also referred to as behavioral collection scoring, can be
developed to assess the likelihood of collection or the " risk" associated with an account.
These models incorporate variables such as the number of previous delinquencies, actions
taken to resolve previous delinquencies, amount and age of the receivable, and the debtor's
taxable income.
Profiling provides fairer, more equitable treatment of taxpayers, taking strong collection
action only against those avoiding payment, not those attempting to comply. For example,
a taxpayer with no previous history of delinquency owing a relatively small amount may
be sent a number of automated billings attempting to resolve the account before phone
contact is attempted. In contrast, an account that has been in collections previously and has
required enforcement actions to force resolution may not receive any automated letters or
phone contact but would simply be forwarded for swift and appropriate enforcement action.
Collection agencies utilizing debtor information - Private and public collection operations
are increasingly using information concerning debtor characteristics to customize collection
efforts. The federal General Accounting Office ( GAO) reports that debtor profiling is
becoming more common in private firms. Modeling techniques also are being used by banks
and mortgage companies to determine whether loans should be approved and what actions
should be taken when loan payments are past due. Interviews with private firms indicate
that customizing the collection process has led to both increased revenue collection and
improved customer relations. The GAO noted similar findings in a 1993 report.
Public tax collection agencies are also beginning to use debtor profiling. For instance, in
response to a recommendation from the GAO, the IRS has initiated a pilot behavior scoring
program in its western region with the intention of eventually implementing these models
nationwide. Some states also are beginning to better utilize debtor information and customize
collection efforts. For instance, the Minnesota Department of Revenue distinguishes between
cooperative and uncooperative business taxpayers based on current and past responses to
collection efforts. In addition, the California Franchise Tax Board implemented behavior
scoring technology to prioritize all accounts entering its collection system.
DOR Should Consider Using
Debtor Information to Better
Manage Its Delinquent Tax Accounts
Debtor profiling would enhance DOR's ability to effectively manage collection accounts. In
most cases, the Department does not use information concerning debtors to tailor collection
efforts. Debtor profiling could be accomplished through acquisition of available software or
reprogramming of DOR's existing automated collection system.
DOR does slot utilize debtor profiliirzg for irlzost accounts - Generally, the Department uses
the same process for all delinquent accounts without considering how likely it is the
taxpayer will pay his debt DOR typically utilizes a three- stage collection process using
automated letters, followed by phone contact, then field collection. Except for cases involving
large delinquencies, an account generally follows this same process until the case is resolved
or deemed uncollectible. In fiscal year 1994,57.1 percent of accounts entering collections had
been in the collections process at least once before. No steps are taken to classify these
accounts differently from first- time offenders. The following case example illustrates how
debtor profiling could have assisted DOR in more quickly resolving a delinquent account.(')
A taxpayer entered the automated collection system on July 8,1991. The taxpayer made
three promises to pay the liability and defaulted on each one. Over the course of 14
months, 8 phone attempts, 1 field call, and 3 levies were necessary to finally resolve the
(') Accounts within the collection process, however, are prioritized by both dollar amount and receivable
age. In addition, large accounts are selected out for immediate action. Further, BOR may also deviate
from its typical collections process if other factors arise.
account on September 23,1992. On July 13,1993, the taxpayer became delinquent for a
second time and was placed in phone collections, in accordance with agency policy. DOR
then made 15 phone attempts before taking enforcement action, 1 year after the entry
date. During this period the taxpayer again broke many promises to pay and the liability
increased from $ 228 to $ 2,740. Ths case was finally resolved in May of 1995, almost two
years after it entered collections. This account could have been forwarded directly to the
field collections unit based on its prior hstory. This would have accelerated resolution
and saved a sigruficant amount of collector time.
Debtor profiling is feasible - The Department should consider using debtor profiling to
enhance its collection efforts. Software is available to develop and evaluate debtor profiling
models. The California Franchise Tax Board utilizes this software to fachtate its account
ranking and has stated it improved collector efficiency by directing resources where they
are most effective.
DOR should approach debtor profiling in two ways. First, DOR should determine whether
it can inexpensively implement some basic debtor profiling tasks using its current automated
system, such as whether a person or business was delinquent previously, or whether or not
an account was resolved satisfactorily or needed additional enforcement action such as a lien
or levy. Second, DOR needs to take into account the need for debtor profiling as it considers
a more modern automated collections system in the future. The current automated collections
system is limited in its capabilities to do debtor profiling and other more sophisticated
collection tasks. Other pertinent information regarding the benefits of a more modem
automated collections system is presented on page 31.
RECOMMENDATION
1. DOR should consider utilizing debtor profiling in the future to customize debt collection
efforts.
OTHER PERTINENT INFORMATION
During the course of our audit, we reviewed the adequacy of DOR's current automated
collection system and compiled information on more innovative systems.
Current Automation Outdated
The Department's automated collection system is outdated and limited in its performance.
A 1985 performance audit conducted by our Office identified the need for an automated
collection system. A system was purchased later that year and was implemented in 1987.
This automated collection system replaced a manual process and significantly improved
collection levels. However, the system's capabilities are limited, especially given the
increasing number of accounts now in the collections inventory. Computer technology in
the collections area has progressed rapidly in the eight years since DOR implemented its
current system. Problems with system effectiveness include:
Lack of reliable information - The Department's automated collection system does not
provide necessary information to make informed management decisions and monitor
accounts. For example, the percentage of cases collected in full cannot be tracked. The
system also does not provide information concerning success of liens, levies, and payment
agreements. On numerous occasions during our audit work, basic statistics related to
collection performance could not be generated by DOR's automated collections system.
Dependence upon collector intervention - DOR's current automated system relies
heavily on collector intervention. Manual decisions must be made by DOR collection staff
before action can be taken on an account. Liens and/ or levies cannot be performed
without a collector viewing an account and determining this action is appropriate.
Accounts cannot be moved between worklists without a collector instigating the change.
In contrast, the Arizona Department of Economic Security, Unemployment Tax Division,
is able to automatically route accounts under $ 100 to a separate worklist These accounts
are then sent automated letters to encourage payment Actions are more timely since the
computer locates these accounts rather than a collector.
Technology has been developed since DOR implemented its current system, which is
designed specifically for public sector collection operations. Benefits of these systems include:
Increased debtor information - To customize collection procedures, detailed information
must be maintained concerning the characteristics of debtors and previous collection
actions taken by the Department Advanced automated systems track and summarize
enforcement actions taken on each account, the success of these enforcement actions, and
the number of payment agreements entered into and kept.
Automatic routing of accounts - Accounts can be moved by programming Department
criteria into the system, therefore bypassing collector intervention. Management would
have the ability to define criteria for an account to be moved within the system. For
example, accounts within specifred dollar and age ranges could be searched out and
instantly routed to a workllst for a specific action. Management would have this
capability through their personal computers. In contrast, management currently needs
to request mainframe programming.
Consistent use of enforcement tools - FOP accounts meeting Department enforcement
criteria, typically liens and/ or levies, action could take place without collector intervention
and with greater consistency. Swifter action could be taken on seriously delinquent
accounts.
Other state collection operations are in the process of implementing these types of systems
to increase the effectiveness of their collection efforts. Cost estimates for these innovative
collection systems range from $ 350,000 to $ 900,000. However, results of these new systems
are not yet available.
I Agency Response 1
FIFE SYMINGTON ( GOVERNOR
ARIZONA DEPARTMENT OF REVENUE
1600 WEST MONROE - PHOENIX, ARIZONA 85007- 2650
HAROLD SCOTT
DIRECTOR
December 13, 1995
Mr. Douglas R. Norton, Auditor General
OEce of the Auditor General
2910 North 44th Street, Suite 410
Phoenix, AZ 850 18- 7243
Dear Mr. Norton:
We have received the final report of your performance audit of the Department of
Revenue ( DOR), Collections Section. Following is our response to that audit report in the
form of an overview, general comments on some of the findings, and specific responses to
each recommendation:
OVERVIEW
The Department has a significant conceptual disagreement with the Auditor General
regarding the approach that should be taken to the collection of delinquent taxes.
Throughout the Collection report, a repeating theme is that the Department's
determination on enforcement action should be governed by an established set of rules
which are then essentially followed automatically. The Department disagrees with this
approach.
The Department believes that each taxpayer's situation is different and collectors need the
flexibility to customize their collection strategy to each individual situation. The fact that
a taxpayer is in some form of economic distress does not change the fact that he is our
customer and that the collection strategy utilized should be the one that maximizes
collections while minimizing the intrusion into, and effect upon, the taxpayer's life.
Therefore the Department views its guidelines as exactly that -- a standard against which
the collectors should measure their individualized collection strategies. When liens and
levies are not issued at the time set forth in the guidelines, that does not by itself constitute
a failure to follow the guidelines; instead, it may represent an appropriately considered
OTHER LOCATIONS: Tucson Government Mall - 400 W. CONGRESS - TUCSON
East Valley - 144011460 E. SOUTHERN - TEMPE
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 2
decision by the revenue officer using his professional judgment that a different approach is
more appropriate. That is why they are " guidelines", not rules.
In most cases ( in fact, all that are specifically cited in the report), it is not a question of
" lost" revenues, but an issue of the timing of collections. Collecting the delinquent
amounts, albeit at a later date with interest, has resulted in the State being made whole
without making the taxpayer who has fallen upon hard times a victim of an unthinking,
unfeeling, rule bound bureaucracy.
It is also worth noting that the Department averages approximately $ 1,000,000 per year in
collections for each collector position. This average collection is generated despite a
terribly high attrition rate ( and therefore vacancy rate) for collectors driven by an
uncompetitive salary structure and the difficult nature of the job. Given a six month
training cycle, and the impact on senior collectors who must provide the on the job
training, the single biggest gain, at the lowest overall cost, could be achieved by raising the
salaries of the collectors thereby reducing attrition and providing the state with
experienced collectors.
The Department's various efforts to continually improve and refine its collection processes
are bearing fruit. The downward trend since 1994 in collectable accounts receivable
shown in the chart on page 16 of the report has continued. The collectable accounts
receivable balance, as of the end of November, has dropped to $ 200.7 million.
FINDING I
Only those delinquent taxpayers who require enforcement action are and should be
subiected to enforcement action. While the statement that only a few severely
delinquent taxpayers are subjected to enforcement action may be factually correct, it is
misleading. The Department believes, as do most public and private collections
programs, in staging its collections efforts. Most taxpayers will, and do, pay their
liabilities without forcing the Department to take enforcement actions. As you note, only
those who fail to do so should, under normal circumstances, be subjected to enforcement
actions. Subjecting the State's citizenry to unnecessary levy and lien action would be an
abuse of Departmental authority.
The alleged inconsistent application of levies will not leave millions uncollected. The
Department agrees that for a period of time in late 1994 and early 1995 some collectors
did not issue levies in some cases where such action was appropriate. The Department
identified this problem and took steps to remedy it. In FYE95, the Collections Section
issued levies on 52,597 accounts, a 61% increase over FYE94. However, the suggestion
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 3
that as much as [ emphasis added by DOR] $ 2.6 million may have gone uncollected
annually is unsupported by the data.
The cost effectiveness of an automated l e v svstem is suspect. The Department agrees
that a computer system that could use expert type systems to evaluate the likelihood that a
levy is appropriate at a given time would be helphl to the Department and its collection
process since it would assist the collector and his supervisor in making the final decision.
However, it must be recognized that the introduction of such a system would necessitate a
major capital expenditure since the Department's current automated collection system is
incapable of implementing such a system. The Department has been unable to identifl
any vendor or set of vendors who could provide such a system at the costs set forth in the
report ($ 350,000 to $ 900,000). The Department's experience leads it to conclude that
such a system, if purchased today, would cost well in excess of one million dollars.
Whether the gain from such a system would be worth the costs of purchasing and
implementing it is a matter that must be carefblly studied.
Pavment agreements need to be carefullv monitored, but more aggressive collection
actions will not necessarily increase revenue to the state and mav unnecessarily
harm the taxpavers. The report states that millions of dollars went uncollected because
of broken promises. As in several other places, that kind of statement is misleading.
There are many reasons why a promise may be recorded as broken, some of which are
circumstances beyond the control of the taxpayer. DOR collectors have the discretion to
use their professional judgment and consider the circumstances in deciding whether to
reset payment agreements or pursue forced collections. The goal is not to punish the
taxpayer but to secure resolution of the tax debt in the fairest, least intrusive and
burdensome manner possible.
Having said that, the Department does agree that in late 1994 and early 1995 some
collectors were failing to take appropriate enforcement action when taxpayers failed to
perform upon their payment agreement promises and meet their tax obligations, and the
Department had already implemented new management policies to see that the collectors
utilize their judgment to defer enforcement action only in appropriate circumstances. The
management study referenced on page 12 was part of that self- initiated internal
management review by the Collections section.
Recommendation I. 7he Legislature should consider providing DOR statutory authority
to allow the Department to deduct applicable credit card fees from the tax payments
received.
The Department has been studying and planning to implement the use of credit cards in
limited circumstances in fbture years. However, as in the case of automatic withdrawal
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 4
payments, the most troublesome accounts will be those of persons who are not credit
worthy and do not have credit cards.
The Department believes that the Legislature should closely examine the impact of
permitting the Department to absorb the credit card fees. Many credit cards grant the
holders benefits deriving from the use of the card ( frequent flyer miles, cash back, etc.)
and under varying circumstances won't even charge interest if the account is paid
promptly. The legislative change suggested by the report could induce many taxpayers to
use the credit card in lieu of the payment they would normally make. The impact on the
state of absorbing the fee in such cases could be substantial.
Recommendation 2. The Department should take the following steps to increase the
effectiveness of enforcement tools.
R Improve management oversight of collector compliarzce with DOR lien and levy
guidelines.
e Ensure that required levy source searches are done prior to issuing mass levies.
R Reduce the dollar threshold required to jle liens without supervisory approval.
The Department believes it has already taken steps to improve management oversight of
all aspects of collector compliance with DOR lien and levy guidelines, including the
requirement for levy source searches prior to issuing mass levies, as evidenced by the
internal collections study referenced in the report.
The Department will do a pilot test to determine if lowering the dollar threshold for liens
is cost effective. If it proves to be cost effective, this may be addressed in future budget
requests.
Recommendation 3. As the Department considers acquiring a new automated collections
system, it should ensure that systems under consideration are capable of automating levy
and lien determination.
When considering the acquisition of a new automated collections system, the Department
will include this feature in the RFP. While the Department disagrees with the concept of
automatically issuing a levy or lien irrespective of the unique facts and circumstances of an
individual case, it does agree that automation could enhance the professional efforts of the
collectors to structure the appropriate collection strategy for each taxpayer. The extensive
system recommended by the Auditor General needs to be carefully studied given its cost.
Meanwhile, the Department has been working for more than a year on a series of
computer programs that will significantly increase the automated capacity of the
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 5
Department to issue and release liens and to reduce the costs associated with those
actions.
Recommendation 4. lhe Department should require automatic withdrawal for delinquent
taxpayer payment agreements, where available.
While the Department has no objection to implementing an electronic fbnds withdrawal
program for taxpayers on payment agreements if it will generate greater compliance at less
cost, it is worth noting that many delinquent taxpayers are not credit worthy and do not
have bank accounts from which to make automatic withdrawals. Since such a program is
necessarily limited to those taxpayers with bank accounts, they are a preselected group of
delinquent taxpayers who are most likely to meet their tax obligations anyway. In
addition, there will be costs associated with establishing such a program. The Department
will pilot test this program and if it proves effective, will seek its implementation.
Recommendation 5. The Department should monitor payment agreements to ensure that
the number of installments and the installment amounts are reasonable.
The Department will continue to monitor payment agreements to ensure they are
reasonable. However, to the extent that the recommendation implies that payment
agreement length should be restricted, the Department notes that the IRS is currently
permitting individual taxpayers to enter into three year payment agreements and it would
be extremely difficult to establish a significantly different standard given the imminent
implementation of a nationally recognized program between the Department and the
Southwest District of the IRS to place common delinquent taxpayers on a coordinated
payment agreement for both agencies.
Recommendation. To address excessive field collector caseloads, DOR should request
additional funding for 18 additional freld collectors. However, the Department may be
able to minimize the cost of new collector positions by transferring positions from other
areas within DOR to the Collections Section.
The Department agrees that additional staff is needed, especially in field collections, to
collect the delinquent taxes owed to the State. In recognition of the need for additional
collectors and changes in compliance patterns of individual income tax filers, the
Department had already designed and commenced implementation of a plan to convert
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 6
sixteen individual income tax audit positions into collector positions. Six of these were
converted to field collector positions and the remaining ten to office collectors. While
these sixteen positions have already improved the overall effort, the additional 18 field
collector positions recommended by the Auditor General will have a very positive effect
on reducing the field collector caseloads to a workable level. The Department is
continuing to monitor and identifl full time positions that could be better utilized in
collections.
The Department's various efforts to continually improve and refine its collection processes
are bearing fruit. The downward trend since 1994 in collectable accounts receivable
shown in the chart on page 16 of the report has continued. The collectable accounts
receivable balance, as of the end of November, has dropped to $ 200.7 million.
FINDING III
Recommendation I. DOR should develop and implement a program to match payments
made to state employees and vendors on state contracts with state tax liabilities to
expedite the collection of tax delinquencies.
The Department agrees that automation of the process of matching employees to
delinquencies would enhance collections. However, the Department believes that focusing
attention on only state employees is a shortsighted effort. Instead, the Department is
working with the state Department of Economic Security to implement a total automated
matching program of all delinquent taxpayers against the DES employment tax records in
order to identifl potential wage levy sources. This program, when completed, will
provide the Department with the matching capability for almost all waged employees, not
just state employees.
The Department agrees that a vendor matching program with the Department of
Administration is a good idea and has established a joint task force with the Department of
Administration to implement such a program.
Recommendation 2. DOR should continue development and implementation of a
program to identzfi wage levy sources by matching its delinquent tax information with
the Department of Economic Security's unemployment tax database of employers and
employees.
As indicated above, the Department is doing this.
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 7
FINDING IV
Recommendation I. DOR should consider utilizing debtor profiling in the future to
customize debt collection efforts.
Debtor profiling is a fairly new technology that has great promise but has not yet been
successfUlly implemented in government tax agencies. The successhl implementation of
debtor profiling is dependent upon the quantity, quality and accessibility of debtor
information. Furthermore, much of the debtor profiling being used in the private sector is
aimed at the extension of credit rather than the collection of monies owed.
The Department would have a great deal of difficulty implementing debtor profiling with
its current automated collection systems. The implementation of debtor profiling would
depend upon not just purchasing and customizing a debtor profiling package but also
upgrading the Department's current automated collection system to a new, more modern
one capable of using such profiles and making additional changes to the Department's
accounts receivable system and mainframe hardware.
The total cost of such a combined package would be substantial. Contrary to the
implication in the report, California's Franchise Tax Board is implementing its debtor
profiling system simultaneously with its implementation of a new automated collections
system. In fact, California officials have indicated to DOR officials that they cannot
determine at this time how much of their improvements are attributable to the new
automated collections system and how much to debtor profiling. Given the necessary
interrelationship between debtor profiling and the automated collection system it feeds and
analyzes, the Department believes that it is more prudent to consider this hnctionality at
the time it upgrades its automated collection system and will do so at that time.
OTHER PERTINENT INFORMATION
While not making a finding, nor a formal recommendation, the report notes that new and
improved systems exist for automating collection activities. The Department agrees that
the current system used by DOR is somewhat outdated and limited in what it can do given
modern technology. However, the Department believes that the report dramatically
understates the true costs of upgrading and makes no effort to quantifL the benefits
associated with such an effort. The Department will study this and, if it believes the
benefits exceed the costs and provide an acceptable return rate, will approach the
Legislature with the proposal.
Mr. Douglas R. Norton, Auditor General
December 13, 1995
Page 8
The Department commends the Auditor General for recognizing and acknowledging that
the current system is reaching the limits of its capacity and will ultimately have to be
upgraded or replaced with newer technology. It is during that natural evolutionary
transition to newer technology that many of the enhancements suggested can be
appropriately addressed.
Sincerely,
Harold Scott
Director